-NRLF 


B   4   4^fl   fl74 


THE  FINANCES  OF  THE  CITY 
OF  NEW  YORK 


BY 

YIN  CH'U  MA 


SUBMITTED    IN    PARTIAL    FULFILMENT    OF    THE    REQUIREMENTS 

FOR    THE    DEGREE   OF    DOCTOR    OF    PHILOSOPHY 

IN  THE 

Faculty  of  Political  Science 
Columbia  University 


NEW  YORK 
I914 


jC, 


Copyright,  1914 

BY 

The  Faculty  of  Political  Science  of, 
Columbia  University,  New  York    / 


•  r-. 


'/•:•:{  :"-i:    lA 


THE  AUTHOR'S  PREFACE 

The  Finances  of  the  Empire  City  of  New  York  and 
those  of  the  Empire  Republic  of  China  have  many  points  of 
resemblance.  For  instance,  the  method  of  budget-making 
in  New  York  City,  some  six  years  ago,  was  very  similar  to 
the  method  used  in  China  under  the  monarchy,  which  con- 
sisted in  granting  budgetary  appropriations  in  lump  sums, 
without  any  definite  and  clear  segregation  according  to  func- 
tions and  objects  of  expenditure.  Again,  the  debt  of  New 
York  City,  has  been  allowed  to  grow  to  its  present  size  of 
over  a  billion  dollars,  without  any  attempt  on  the  part  of 
the  city  officials,  until  recently,  to  keep  it  in  check  by  intro- 
ducing scientific  methods  of  administration,  just  as  the  na- 
tional debt  of  China  has  been  permitted  to  grow  to  its  pres- 
ent size  without  any  attempt  on  the  part  of  the  Chinese  offi- 
cials to  check  its  growth.  In  the  following  monograph  I 
have  attempted  to  make  a  close  study  of  the  various  phases 
of  the  financial  transactions  of  the  City  of  New  York,  as 
reflected  in  the  $841,000,000  of  actual  cash  receipts  and  the 
$844,000,000  of  actual  cash  payments  in  1913,  and  to  ex- 
plain how  New  York  City  is  now  financially  maintained. 
Such  a  study  serves  to  make  clear  the  means  by  which  the 
city  has  passed  or  is  passing  out  of  a  financial  chaos  into  a 
financial  system,  and  affords  a  valuable  lesson  for  China's 
benefit.  Many  of  the  scientific  methods  adopted  by  New 
York  City  in  reforming  her  finances  have  been  adopted  by 
other  cities  in  the  United  States  for  reforming  theirs.  Even 
the  United  States  Government  is  now  making  a  special  ef- 
fort to  use  the  same  methods  of  budgetary  segregation  as 
189]  5 


i^i  .*-N  »»••  ,'~>  £~^  d~\ 


THE  AUTHOR'S  PREFACE 


[190 


are  in  use  in  New  York  City  to-day.  I  see  no  reason  why  a 
system  that  admits  of  being  copied  and  successfully  installed 
by  municipal  and  the  federal  governments  in  the  old  Re- 
public of  the  United  States,  may  not  be  copied  and  installed 
by  the  provincial  and  the  central  governments  of  the  Young 
Republic  of  China.  The  details  in  each  particular  case  of 
application  may  vary  from  locality  to  locality,  but  the  prin- 
ciples underlying  the  details,  so  far  as  they  are  known  to 
me,  are  practically  the  same.  Even  though  it  will  not  be 
easy  for  China  to  follow  New  York  City's  example,  I  be- 
lieve this  account  of  how  New  York  City  has  been  finan- 
cially maintained,  without  even  a  fractional  loss  of  her 
credit,  will  be  of  value  to  Chinese  fiscal  authorities,  particu- 
larly if  it  be  translated  into  the  Chinese  language. 

For  the  sake  of  clearness,  I  have  treated  the  subject  under 
four  separate  topics,  viz. :  (i)  scientific  budget-making,  (2) 
the  system  of  taxation,  (3)  the  administration  of  the 
city  debt,  and  (4)  the  control  of  revenues  and  expenditures 
under  the  new  system  of  accounting.  All  of  these  separate 
parts  are,  however,  linked  together  into  a  continuous  chain 
of  logical  reasoning,  as  clearly  indicated  in  the  introductory 
chapter.  My  chief  disappointment  is  that  although  I  have 
succeeded  in  treating  the  various  phases  of  the  subject  as  a 
unit,  I  have  failed  to  describe  fully  the  whole  financial  situ- 
ation. This  has  been  due  in  part,  I  must  confess,  to  the 
fact  that  with  so  many  factors  to  be  taken  into  considera- 
tion, my  mind  has  failed  to  comprehend  all  or  perhaps  even 
the  most  important  of  them.  This  failure  occurred,  not- 
withstanding the  great  encouragement  of  my  major  pro- 
fessor, Professor  Edwin  R.  A.  Seligman,  who  has  not  only 
given  me  valuable  suggestions  as  to  the  improvement  of  my 
work,  but  has  also  kindly  arranged  to  have  the  Series  bear 
approximately  eighty  per  cent  of  the  total  cost  of  printing 
this  book.     To  him,  therefore,  is  due  my  most  cordial  ack- 


IQI] 


THE  AUTHOR'S  PREFACE 


nowledgment.  I  cannot  refrain  from  expressing  equally 
deep  indebtedness  to  another  major  professor  of  mine,  Pro- 
fessor Henry  R.  Seager,  for  his  excellent  remarks  made  at 
a  seminar  meeting,  which  called  my  attention  to  a  vital 
point  I  had  overlooked,  as  well  as  for  the  detailed  sugges- 
tions and  improvements  he  has  made  in  this  book.  I  am 
also  more  than  ordinarily  indebted  to  the  Hon.  Shah  Kai- 
Fu,  Chinese  Minister  at  Washington ;  Hon.  Yang  Yu-Ying, 
Chinese  Consul-General  in  New  York,  and  Hon.  Francis 
Chang,  Chinese  Vice-Consul  in  New  York,  for  their  united 
effort  in  securing  from  the  Chinese  Government  four 
months'  extension  of  time  in  which  to  finish  my  work;  to 
the  Hon.  Lawson  Purdy,  President  of  the  Department  of 
Taxes  and  Assessment,  New  York  City;  Hon.  William  A. 
Prendergast,  Comptroller  of  the  City  of  New  York,  and 
his  assistants,  Mr.  Duncan  Maclnnes,  Chief  Accountant, 
Mr.  Robert  B.  Mclntyre,  Expert  Accountant;  Mr.  H.  H. 
Rathyen,  Auditor  of  Receipts;  and  also  to  the  ladies  and 
gentlemen  in  the  Bureau  of  Municipal  Research,  espec- 
ially Mr.  Lindars,  and  to  some  gentlemen  of  the  Department 
of  Water  Supply,  Gas  and  Electricity,  especially  Mr. 
Hawkins. 

Yin  Ch'u  Ma. 

Columbia  University,  August  s,  1914. 


TABLE  OF  CONTENTS 


PAGE 

Introduction 15 

PART  1 
Scientific  Budget  Making 

CHAPTER  I 

Segregation  of  Budgetary  Estimates 

A.  Review  of  rule-of  thumb  budget-making:  (i)  lump  sum  esti- 
mates, (2)  service  data  not  obtainable,  (3)  cost  data  not  obtaina- 
ble, (4)  indefinite  statements  or  explanations  accompanying  the 
estimates;  B.  Necessity  of  double  segregation;  C.  Segregation 
by  functions;  D.  Segregation  by  objects  of  expenditure:  (i) 
method  of  segregation,  (2)  the  personal  service  group,  (a)  sala- 
ries and  wages  classified,  (b)  inequalities  in  salaries  and  wages, 
and  (c)  the  standardization  of  salaries  and  wages,  and  (3)  mate- 
rials, supplies  and  equipment  group,  (a)  definition  and  classifica- 
tion, (b)  estimates  rendered  inaccurate  by  the  decentralized  sys- 
tem of  purchasing  supplies,  (c)  how  purchases  of  supplies  are 
made  by  the  city  (d)  a  general  city  storehouse,  (e)  standardiza- 
tion of  materials  and  supplies,  and  (f)  a  central  purchasing 
bureau;  E.  Alleged  disadvantage  of  segregation;  F.  Advantages 
of  segregation 25 

CHAPTER  II 

Preparation  and  Examination  of  Budgetary  Estimates 

A.  Preparation  of  budgetary  estimates:  (i)  method  followed  by 
departments  in  filling  out  budgetary  salary-forms,  (2)  salary  and 
wage  appropriations  from  "mixed  funds",  (3)  schedule  forms 
for  supplies,  (4)  actual  cost  obtained  and  (5)  additional  informa- 
tion required;  B.  Examination  of  departmental  estimates:  (i) 
193]  9 


10  CONTENTS  [194 

PAGE 

role  played  by  the  examiners,  (2)  justification  of  an  independent 
examination  by  the  examiners,  and  (3)  problem  of  examination 
reducible  to  seven  simple  elements.  64 

CHAPTER  III 

Hearing,  Voting,  Funding  and  Administering  the  Budget 

A.  Hearing  the  budget:  (i)  publicity  through  the  press,  budget 
news  bulletins  and  the  city  record,  (2)  publicity  through  budget- 
exhibit,  (3)  public  hearings  on  the  estimates,  and  (4)  the  tenta- 
tive budget  and  the  hearing  thereon;  B.  Voting  of  the  budget: 
(i)  the  procedure  of  voting:  (2)  cuttingdown  the  yearly  increases, 
(3)  double  responsibility  of  the  elective  offices,  and  (4)  controlla- 
ble and  uncontrollable  budgetary  items;  C.  Funding  of  the  budget: 
(i)  transmission  of  the  budget  for  funding,  and  (2)  the  means  of 
funding;  D.  Administering  the  budget 85 

PART  II 

The  System  of  Taxation 
CHAPTER  IV 

The  Real  Estate  Tax 

Introduction;  A.  Separation  of  state  taxation  from  local  taxation; 
B.  Relative  burden  of  taxation  on  real  estate  and  on  personal 
property;  C.  Increase  of  annual  taxes  versus  increase  of  real 
estate  values;  D.  The  Department  of  Taxes  and  Assessment; 
E.  Block  and  lot  maps;  F.  Land  value  maps;  G.  Separate  assess- 
ment of  land  and  buildings;  H.  Methods  of  arriving  at  land 
values;  I.  Hiding  true  consideration  in  deeds;  J.  Valuation  of 
buildings;  K.  Buildings  under  construction  not  taxed;  L.  The 
two-column  statement  versus  the  three-column  statement;  M. 
Assessment  at  full  value .....     107 

CHAPTER  V 
Other  Taxes 

A.  The  special  franchise  tax:  (i)  purpose  of  the  special  franchise 
tax,  (2)  relation  between  special  franchises  and  tangible  property, 
(3)  special  franchise  tax  used  as  an  offset,  and  (4)  the  net  earning 
rule;  B.  The  personal  property  tax:  (i)  personal  property  tax  a 


195]  CONTENTS  II 

PAGE 

failure,  (2)  viciousness  of  the  personal  property  tax,  (3)  personal 
property  tax  uncollectible,  and  (4)  substitution  of  special  taxes 
for  personal  tax;  C.  Taxes  on  banks  and  trust  companies:  (i) 
the  bank  tax  under  the  general  property  tax,  (2)  the  special  tax, 
(3)  benefits  of  the  special  tax,  and  (4)  comparison  between  the 
old  and  the  new  tax;  D.  The  tax  on  mortgages:  (i)  undesira- 
bility  of  the  old  mortgage  tax  laws,  (2)  the  taxation  of  mort- 
gages unjust  and  undesirable,  (3)  the  new  mortgage  recording 
tax,  (4)  good  features  of  the  mortgage-recording  tax,  and  (5) 
alleged  defects  of  the  recording  tax;  E.  The  excise  law    ....    131 


PART  III 

The  City  Debt 

CHAPTER  VI 

Origin,  Classification,  Limit  and  Computation  of  the  City  Debt 
A.  Temporary  loans:  (i)  revenue  bonds,  (2)  special  revenue  bonds; 

B.'  Long-term    financing:  the  funded  debt;    C.  The  debt    limit; 

D.  Computation  of  the  city  debt 155 

CHAPTER  VII 

The  City  Bonds 

A.  New  York  City  bonds  preferred  by  investors;  B.  The  work  of 
the  bond  house;  C.  Difficulty  of  marketing  the  city  bonds;  D. 
Issuing  bonds  in  small  denominations 178 

CHAPTER  VIII 

New  Methods  of  Financing 

A.  New  methods  of  temporary  financing;  B.  New  methods  of  long- 
term  financing;  C.  New  method  of  sale;  D.  New  methods  of 
maintaining  the  sinking  funds:  (i)  how  a  sinking  fund  is  estab- 
lished, (2)  present  sinking  funds  of  New  York  City,  (3)  Equali- 
zation of  burdens  between  present  and  future  taxpayers,  (4) 
Serial  bond  method  v.  Sinking-fund  method,  (5)  Changes  in 
sinking-fund  investments 198 


12  CONTENTS  [196 

PAGB 

PART   IV 

Control  of  Revenues  and  Expenditures  under 
THE  New  System  of  Accounting 

CHAPTER  IX 

Control  of  Revenue  Accruals  under  the  New  System  of 

Accounting 

A.  Cost  of  installing  the  new  system;  B.  Importance  of  accounting 
control  over  revenue  accruals;  C.  Classes  of  revenue  accruals;  D. 
Control  of  revenue  accruals  creating  accounts  receivable:  (i)  con- 
trol established  through  the  accrual  registers,  (2)  prebilling  of 
taxes,  {3)  advantages  of  prebilling,  (4)  Control  of  cash  payments 
by  a  system  of  internal  checks,  (5)  auditing  collections,  (6)  the 
control  sheet  and  its  purpose,  iy^  the  general  journal  entries,  (8) 
efificiency  in  the  collection  of  arrears;  E.  Control  of  revenue 
accruals  coincident  with  cash:  (i)  difference  between  accruals 
creating  accounts  receivable  and  accruals  coincident  with  cash, 
(2)  control  of  fixed  charges,  (3)  control  of  non-fixed  charges,  227 
(4)  control  of  receipts. 

CHAPTER    X 

Control  of  Water  Revenue  under  the  New  System  of 

Accounting 

A.  The  frontage  rate  and  the  meter  rate;  B.  Accounting  system 
in  the  frontage  rate  division;  C.  Present  system  of  accounting 
for  the  meter  rates;  D.  Adjustments;  E.  Control  of  collections; 
F.  Control  ledgers;  G.  Documents  transmitted  to  the  department 
of  finance;  H.  Result  of  the  new  system  of  accounting 250 

CHAPTER   XI 

Control  of  Expenditures  for  Supplies,  Materials  and 
Equipment  under  the  New  System  of  Accounting 

A.  Contract  and  open  market  orders;  B.  Invoices;  C.  Inspection 
of  goods  delivered;  D.  Vouchers;  E.  The  tickler;  F.  Vouchers 
in  the  inspection  division;  G.  Direct  liability  represented  by  the 
unaudited  vouchers;  H.  Vouchers  in  the  auditing  division;  I. 
Drawing,  scheduling,  signing  and  disbursing  of  warrants;  J. 
Prompt  payment  of  claims;  K.  Report  showing  the  condition  of 
each  account 269 


1^7]  CONTENTS  13 

PAGE 

CHAPTER   XII 

Control  of  Expenditures  for  Salaries  and  Wages  under 
THE  New  System  of  Accounting 

A.  Budget  the  foundation  of  accounting  control  over  expenditures; 
B.  Data  for  the  making  of  payrolls;  C.  Preparation  of  payrolls; 
D.  Recapitulation  of  payrolls;  E.  Restrictions  over  the  expendi- 
ture for  personal  services;  F.  Purpose  and  significance  of  the 
restrictions;  G.  Payroll  examination  and  payroll  auditing;  H. 
Payrolls  supported  by  certificates 296 


INTRODUCTION 

Leaving  the  corporate  stock  budget  out  of  consideration 
for  the  present,  I  shall  first  speak  of  the  annual  tax  budget 
of  the  City  of  New  York,  which  now  amounts  to  approxi- 
mately $192,000,000.  In  the  past,  much  of  this  budget  has 
been  due  to  extravagance,  waste,  favoritism  and  cor- 
ruption, as  a  result  of  the  rule-of-thumb  method  of  budget- 
making.  Budgetary  appropriations  were  made  in  lump 
sums,  not  clearly  and  sufficiently  segregated  by  functions  as 
well  as  by  objects  of  expenditure.  The  salary  and  wage 
allowances  were  determined  not  on  the  pro-rata  basis,  but 
on  the  basis  of  what  was  spent  in  June.  This  enabled  the 
departmental  heads  to  defer  some  May  pleasures  until  June 
and  to  anticipate  some  August  obligations  by  meeting  them 
in  June.  In  this  way,  the  June  expenditure  was  greatly  aug- 
mented and  the  allowances  fixed  on  the  basis  of  this  ex- 
penditure far  exceeded  what  the  department  really  needed. 

Again,  it  is  a  matter  of  common  knowledge  that  the  pub- 
lic money  spenders  used  to  keep  the  personal  service  ex- 
penditure at  a  low  level  for  a  part  of  the  year,  in  order  that 
the  accumulated  excess  might  be  used  to  increase  the  sal- 
aries of  their  favorites  just  before  the  budget-making  time. 
They  also  used  the  high  salaries  on  the  competitive  civil 
service  list,  when  vacancies  occurred,  to  employ  a  large 
number  of  cheap  employees,  especially  near  election  time. 
This  had  the  effect  of  filling  offices  with  incompetents 
and  seriously  impairing  the  esprit  de  corps  of  the  staff. 
The  present  method  of  controlling  the  budget  makes  it  very 
difficult,  if  not  impossible,  to  use  the  public  funds  so  freely, 
199]  15 


l6  INTRODUCTION  [200 

because  the  personal  service  allowances  are  now  made  on 
the  pro-rata  basis. 

The  lump-sum  method  of  budget-making  may  be  illus- 
trated by  the  following  striking  example  found  in  the  1905 
budget : 

"  For  salaries  of  professors,  tutors,  and  others  in  the 
normal  college,  and  in  the  training  department  of  the  normal 
college;  for  scientific  apparatus,  books,  and  all  necessary 
supplies  therefor;  for  replacing  and  altering  the  college 
building,  and  for  the  support,  maintenance  and  general  ex- 
penses of  the  same — $220,000.00." 

The  entire  budget  for  the  normal  college  is  thus  made  in 
one  lump  sum,  not  clearly  segregated  by  functions  and  by 
objects  of  expenditure.  There  is  no  excuse  for  such  an  ap- 
propriation. Allowances  made  in  this  way  might  be  ex- 
pended for  almost  anything.  No  accounting  and  adminis- 
trative control  was  possible,  because  money  spent  on  auto- 
mobiles might  be  paid  out  of  this  total  budget,  under  the 
name  of  "  supplies  "  or  "  general  expense  ".  The  termin- 
ology used  is  so  indefinite  and  so  comprehensive  that  the 
auditors  of  the  chief  financial  officer  could  make  no  proper 
auditing.  Even  if  the  money  was  actually  spent  for  sup- 
plies, then  the  departments  should  state  exactly  for  what 
kind  of  supplies  the  expenditure  was  incurred,  for  the  term 
''  supplies  "  includes  food  supplies,  forage  and  veterinary- 
supplies,  fuel  supplies,  office  supplies,  educational  and  recre- 
ational supplies,  etc.  If  $30,000  were  spent  for  educational 
and  recreational  supplies  for  the  normal  school,  perhaps  no 
body  would  raise  any  objection;  but  if  the  same  amount 
were  spent  for  office  supplies,  every  reasonable  man  would 
surely  ask  for  an  explanation.  It  is  well-nigh  impossible 
properly  to  audit  a  bill  involving  an  expenditure  of  $30,000 
for  supplies,  unless  the  particular  class  of  supplies  is  indi- 
cated.    This  defect,  to  which  might  be  attributed  much  of 


2oi]  INTRODUCTION  I7 

the  waste  and  corruption  in  the  past,  is  now  remedied  by 
the  scientific  method  of  segregation,  which  makes  it  pos- 
sible to  audit,  and  therefore  to  control,  departmental  ex- 
penditures and  at  the  same  time  furnishes  an  adequate  basis 
for  making  appropriations.  Requests  for  money  for  var- 
ious indefinitely-stated  purposes  are  now  no  longer  granted. 
In  a  word,  the  lump-sum  budget  has  now  been  replaced  by  a 
well-organized  and  scientifically  segregated  budget. 

The  annual  budget  having  been  made,  the  next  step  to 
take  is  to  execute  it  or  to  "  fund  "  it.  The  principal  means 
of  "  funding  "  it  is  by  taxation,  which  makes  the  theme  of 
the  second  part  of  this  book.  The  main  source  of  revenue 
in  New  York  City  is  the  real-estate  tax,  the  burden  of  which 
falls  almost  equally  on  all  real  estate,  in  consequence  of 
the  application  of  scientific  methods  of  assessment.  For 
instance,  all  real  estate  in  New  York  City  is  now  assessed 
at  "  full  value  ",  which  is  the  best  standard  for  valuations 
that  has  ever  been  found  in  the  United  States.  If  this 
standard  were  not  adopted,  the  assessors  would  have  noth- 
ing to  guide  them.  Consequently,  one  parcel  of  property 
might  be  assessed  at  50  per  cent  of  its  full  value,  another  at 
60  per  cent,  and  a  third,  at  80  per  cent.  The  burden  of 
taxation  would  not  therefore  fall  upon  all  parcels  with  equal 
weight.  The  adoption  of  "  full  value  "  as  the  standard  re- 
moves to  a  large  extent  the  inequalities  that  formerly  ex- 
isted among  the  taxpayers. 

Not  only  in  the  taxation  of  real  estate,  but  also  in  that  of 
personal  property,  have  wonderful  improvements  been 
made.  When  personal  property  was  assessed  under  the 
system  of  general  property  taxation,  a  large  proportion  of 
it  could  not  be  reached  by  the  ordinary  method  of  local  as- 
sessments. Theoretically,  all  forms  of  personal  property 
were  taxable,  but  practically  only  the  tangibles,  such  as 
horses,  cattle,  merchandise,  machinery,  etc..  were  actually 


1 8  INTRODUCTION  [202 

taxed.     The  intangibles,  such  as  promissory  notes,  book 
credits,  mortgages,  corporate  bonds,  etc.,  generally  escape 
taxation  by  hiding.     Those  who  do  pay  taxes  on  the  intan- 
gibles are  the  ignorant,  the  helpless  and  the  extra-conscien- 
tious.    In  a  word,  the  general  personal  property  tax  proved 
so  unsatisfactory  that  New  York  has,  within  the  last  twenty 
years,  gradually  abandoned  it  and  developed  a  number  of 
special  taxes  to  take  its  place.     These  special  taxes  are  im- 
posed on  special  kinds  of  personal  property.     Formerly, 
practically  all   forms  of  personal   property  were  assessed 
under  the  general  property  tax  by  the  different  localities  at 
the  different  local  rates.     Now  the  state  reserves  to  itself 
the  special  taxes,  leaving  the  real-estate  tax  to  the  localities. 
The  proceeds  of  some  special  taxes,  including  the  taxes  on 
banks  and  trust  companies,  the  mortgage  tax  and  excise  tax, 
are,  however,  distributed  between  the  state  on  the  one  hand, 
and  the  cities  and  counties  on  the  other,  by  virtue  of  the 
fact  that  the  personal  property  assessed  is  of  a  distinctly 
local  character  or  the  value  of  the  property  springs  from 
strictly  municipal  conditions.     As  an  illustration  of  the  su- 
periority of  the  special  taxes  over  the  general  personal  prop- 
erty tax,  we  may  take  the  tax  on  banks,  which  was  for- 
merly treated  under  the  personal  tax  law.     As  the  shares 
of  stock  were  in  the  possession  of  individual  shareholders, 
they  could  easily  be  concealed  and  the  law  could  not  reach 
them.     The  present  law  imposes  a  tax  of  one  per  cent,  not 
on  the  shares  of  stock  which  can  be  hidden,  because  they  are 
in  the  possession  of  the  shareholders,  but  on  the  capital,  sur- 
plus, and  undivided  profits  of  the  bank,  which  cannot  be 
hidden. 

From  the  above,  it  is  clear  that  the  system  of  taxation,  as 
existing  in  New  York  City,  is  fairly  satisfactory.  The  only 
flaw  I  find  in  it  is  the  "  special  franchise  "  tax,  which  has 
become  a  perplexing  problem  not  only  to  the  court  and  the 


203]  INTRODUCTION  19 

tax  authorities,  but  to  the  public  service  corporations  as 
well.  A  partial  discussion  of  this  tax  is  found  in  chapter 
five. 

It  should  be  noted  that  the  annual  tax  budget  does  not 
represent  the  entire  amount  of  money  expended  in  the  year 
for  which  it  is  made.  In  addition  to  the  tax  budget-,  there 
is  now  prepared  a  corporate  stock  budget  every  year,  sub- 
ject to  the  same  process  of  segregation  as  the  tax  budget 
The  corporate  stock  budget  is  funded  by  issuing  long-term 
bonds,  generally  of  fifty  years,  out  of  the  proceeds  of  which 
are  paid  the  charges  for  permanent  improvements,  such  as 
the  subways,  the  aqueduct,  docks  and  ferries,  school  houses, 
the  paving  of  streets,  etc.  The  eagerness  of  the  people  of 
New  York  City  for  these  public  improvements,  as  exhibited 
within  the  past  thirty  years,  is  the  chief  cause  of  the  present 
billion-dollar  debt,  which  is  discussed  in  minute  detail  in 
part  three. 

The  issue  of  fifty-year  bonds  to  finance  such  enterprises 
as  subways,  aqueducts,  docks  and  ferries,  etc.,  is  justified  on 
the  ground  that  they  are  self-sustaining,  whereas  to  pay  for 
school  houses  and  street  paving  by  issuing  long-term 
bonds  is  justified  on  the  ground  that  the  charges  should  be 
spread  over  the  years  benefited.  During  the  period  of  loose 
administration,  however,  it  had  been  the  practice  in  New 
York  City  to  issue  fifty-year  bonds  for  ten-year  street  pav- 
ing. The  consequence  is  that  the  burden  of  paying  mter- 
est  still  continues,  while  the  streets  have  ceased  to  be  of 
any  use  to  the  community.  This  policy  has  now  been 
changed  by  proper  legislation,  authorizing  the  issue  of  ten- 
year  bonds  for  ten-year  streets.  The  City  is  now  planning 
to  replace  the  fifty-year  bonds  by  ten-year  serial  bonds  for 
corporate  stock  purposes,  but  special  legislation  is  necessary 
to  make  this  scheme  operative. 

The  popular  demand  for  present  expensive  improvements. 


20  INTRODUCTION  [204 

with  no  expense  to  the  present  taxpayers,  but  with  a  heavy 
burden  thrown  on  their  posterity,  has  been  fortunately  and 
wisely  checked  by  the  constitutional  limitation  of  the  city's 
indebtedness  to  ten  per  cent  of  the  assessed  valuation  of  its 
real  property.  Most  of  the  questions  as  to  what  portion  of 
the  city's  debt  should  be  considered  as  subject  to  the  consti- 
tutional limitation  and  what  portion  should  not,  have  been 
settled  and  the  margin  of  doubt  has  been  reduced  to  a  mini- 
mum. 

The  financial  interests  of  the  cit}^  are  protected  not  only 
by  the  issue  of  ten-year  bonds  in  the  place  of  the  fifty-year 
bonds,  and  the  constitutional  limitation,  but  also  by  new 
methods  of  financing  the  city's  enterprises  to  the  city's 
great  advantage.  To  illustrate,  it  has  been  the  practice  of 
New  York  City  to  go  into  the  market  for  long-term  bond 
sales  more  than  once  a  year.  But  the  City  often  found  itself 
greatly  embarrassed,  because  money  was  scarce  in  the 
market  or  because  bankers  could  not  dispose  of  the  city 
bonds.  This  method  was  very  costly  to  the  city,  because  the 
city  was  compelled  to  pay  high  rates.  For  these  reasons, 
the  present  comptroller  adopted  the  single-sale-method, 
which  means  that  the  city  will  not  go  into  the  market  for 
long-term  financing  more  than  once  in  a  year.  This  new 
method  has  proved  beneficial  to  the  investing  public  as  well 
as  to  the  city,  because  it  does  not  make  a  pressing  demand 
upon  the  money  market  when  money  is  "  tight  "  and  at  the 
same  time  relieves  the  city  from  the  necessity  of  paying 
high  rates.  A  detailed  discussion  of  this  method  is  found 
in  chapter  eight. 

The  annual  tax  budget  having  been  first  made,  as  dis- 
cussed in  part  one,  then  executed  or  "  funded  "  by  taxa- 
tion, as  discussed  in  part  two,  and  then  supplemented  by 
the  long-term  financing,  as  discussed  in  part  three,  the  next 
two  questions  which  are  answered  in  part  four,  are:  (i) 


205]  INTRODUCTION  21 

how  the  taxes  or  other  revenues  collected  should  be  con- 
trolled so  that  there  will  be  no  leak  or  theft;  and  (2)  after 
the  money  is  collected  and  ready  for  use,  how  should  the 
spending  of  it  be  controlled,  so  that  money  appropriated  for 
one  purpose,  or  for  a  lawful  purpose,  will  not  be  expended 
for  another  purpose  or  for  an  unlawful  purpose?  In  fact, 
New  York  City  has  gone  a  step  further.  The  control  of 
expenditures  is  so  established  that  it  is  now  almost  impos- 
sible for  the  departments  to  spend  more  than  what  is  al- 
lowed in  each  account.  The  methods  of  establishing  a  con- 
trol OA'^er  both  revenues  and  expenditures,  under  the  new 
system  of  accounting,  are  fully  discussed  in  part  four. 

I  have  thus  discussed  the  finances  of  the  City  of  New 
York  from  the  time  that  the  budgetary  estimates  for  the 
ccnning  year's  appropriations  are  analyzed  up  to  the  time 
when  the  money  appropriated  is  expended.  The  four  parts 
of  the  book  thus  constitute  an  organic  whole. 


PART  I 
SCIENTIFIC  BUDGET-MAKING 


CHAPTER  I 

Segregation  of  Budgetary  Estimates 

a.  review  of  rule-of-thumb  budget-making 

I.  The  Lump-Sum  Estimates. — The  estimates  of  the 
amounts  required  for  the  operation  of  the  various  city  de- 
partments have  been,  until  recently,  roughly  prepared  by 
the  departments  themselves,  having  little  definite  infonna- 
tion  to  direct  them.  It  is  safe  to  say  that  their  estimates 
were  very  unreliable.  For  instance,  the  salary  estimates 
were  very  frequently  fixed  by  the  departments,  not  on  a 
pro-rata  basis,  but  on  the  basis  of  what  is  known  as  the 
"  June  Jump  ".  Knowing  that  the  next  year's  salary  ap- 
propriations would  be  based  on  what  was  spent  in  June, 
public  money  spenders  greatly  augmented  the  June  expendi- 
ture by  deferring  some  May  pleasures  until  June  and  by 
anticipating  some  July  obligations  by  meeting  them  in  Jime.^ 
The  salary  allowances  in  the  budget  therefore  far  exceeded 
what  the  department  really  needed. 

All  the  estimates  which  were  submitted  in  lump-sums 
were  not  only  unreliable  but  did  not  afford  suf^cient  detail 
whereby  the  appropriating  body  might  understandingly  pass 
upon  the  necessity  or  advisability  of  granting  the  amounts 
requested.  In  most  instances,  no  segregation  was  made  as 
to  the  amount  required  for  the  several  functions,  sub-func- 
tions, or  activities  of  a  department.  Furthennore,  these 
estimates  were  not  classified  by  the  objects  of  expenditure, 

1  Bureau  of  Municipal  Research,  a  pamphlet  entitled,  Ho'x  Should 
Public  Budgets  be  Made?,  p.  4. 

209]  25 


26  FINANCES  OF  THE  CITY  OF  NEW  YORK  [210 

such  as  salaries  and  wages,  other  services,  equipment,  ma- 
terials, supplies,  etc.  They  appeared  to  have  been  made  on 
the  basis  of  what  was  expended  during  the  previous  year 
instead  of  upon  the  basis  of  particular  needs  for  particular 
purposes.  The  history  of  budget-making  in  New  York 
City  reveals  the  fact  that  however  reasonable  an  estimate 
might  be,  it  would  be  cut  down  by  a  large  percentage  by  the 
Board  of  Estimate  and  Apportionment,  and  the  cutting  has 
been  somewhat  arbitrary.  Accordingly,  when  the  commis- 
sioners made  up  their  estimates,  they  added  to  them  a  con- 
siderable margin  so  that  the  requests,  after  they  had  been 
cut  down  and  granted,  would  still  be  sufficiently  large  to 
meet  the  purpose  they  had  in  mind.^ 

Under  the  old  system  it  was  a  matter  of  great  difficulty 
to  restrict  the  commissioners  to  the  use  of  money  within 
the  amounts  as  set  forth  in  the  budget,  which  is  now  care- 
fully classified,  since  the  lack  of  any  detailed  exhibit  of  the 
purposes  and  objects  of  expenditure  rendered  it  almost  im- 
possible to  keep  the  expenditure  of  public  money  in  check 
and  to  ascertain  whether  or  not  the  money  appropriated 
was  expended  for  the  exact  purposes  for  which  it  was  re- 
quested and  granted. 

II.  Service  Data  not  Obtainable. — These  unsegregated 
estimates  were  undoubtedly  due  to  the  absence  of  scientific 
method  in  keeping  current  records.  Thus,  before  the  time 
of  scientific  budget-making,  the  current  records  and  reports 
of  the  various  departments  did  not  lend  themselves  to  fur- 
nishing ready  and  clear  information  as  to  the  cost  of  main- 
taining each  activity  or  function.  In  the  short  period  of 
eighteen  months,  from  January,  1906,  to  August,  1907,  the 
New  York  Bureau  of  Municipal  Research  set  itself  the 
task  of  securing  better  methods  of  accounting  for  moneys 

1  Budget  and  Citizen,  article  on  estimates,  in  Outlook,  Aug.  28,  1909. 


21 1]  .     SEGREGATION  OF  BUDGETARY  ESTIMATES  27 

Spent  and  for  work  done,  in  order  that  the  cost  of  maintain- 
ing each  activity  might  be  readily  compared  with  its  result/ 
But  in  order  to  carry  out  this  task,  the  City's  hit-or-miss 
method  of  making  its  budget  had  to  give  way  to  the  scien- 
tific method  of  budget-making  as  it  is  in  use  to-day.  Real- 
izing the  importance  of  this  step,  the  Bureau  set  out  to  pre- 
pare a  budget  for  the  health  department,  which  would  il- 
lustrate the  principle  of  setting  forth  the  various  functions 
the  departments  proposed  to  perform  and  the  amount  of 
money  it  requested  for  conducting  each  function." 

To  make  a  budget  for  the  health  department  was,  how- 
ever, no  easy  task.  The  information  gleaned  from  the  var- 
ious reports  and  records  of  service  rendered  was  of  no 
avail  in  budget-making.  Even  the  annual  report  failed  to 
give  publicity  to  the  significant  facts  ;  the  items  were  couched 
in  ambiguous  phraseology,  intelligible  tO'  no  one  except 
the  clerk  who  compiled  them ;  the  different  facts  which 
were  given  were  not  brought  into  clear  relation ;  "  state- 
ments of  fact,  that  related  to  each  other,  were  scattered 
through  the  report,"  and  they  were  not  serviceable  on  ac- 
count of  the  lack  of  an  index.  Similarly,  the  accounts  of 
the  department  were  so  kept  that  information  as  to  cost 
was  not  readily  obtainable.  They  were  classified  not  by 
functions,  but  by  "  funds  "  or  appropriations,  and  it  was 
therefore  hardly  possible  to  find  the  cost  of  each  function 
or  the  comparative  costs  of  all  functions.  To  take  an  illus- 
tration, out  of  the  school  inspection  fund,  were  paid  not 
only  the  salaries  of  the  medical  inspectors  of  schools  but 
also  those  of  the  school  nurses  and  the  summer  corps,  made 
up  of  physicians  and  nurses  charged  with  the  duty  of  mak- 

1  New   York   Bureau   of    Municipal    Research,   Making   a   Municipal 
Budget,  pp.  5-7. 

-  Ibid.,  pp.  5-7- 


28  FINANCES  OF  THE  CITY  OF  NEW  YORK  [212 

ing  house-to-house  inspection  of  babies,  suffering  from  sum- 
mer complaint,  as  well  as  teaching  the  mothers  to  take 
proper  care  of  them/ 

III.  Cost  Data  not  Obtainable. — The  record  of  the  health 
department  failed  to  show  not  only  the  service  data,  but 
also  the  cost  data,  which  are  equally  important  in  making  a 
scientific  budget.  Thus,  from  this  record,  it  was  impos- 
sible to  tell  which  function  or  activity  of  the  department  was 
actually  responsible  for  the  mone}''  spent.  In  salary  ac- 
counts, the  salaiy  of  an  employee  might  be  charged  entirely 
to  a  function  for  which  he  spent  only  a  portion  of  his  time. 
For  instance,  sixty-eight  physicians  were  paid  out  of  the 
"  School  Inspection  Fund  ",  despite  the  fact  that  they  were 
never  detailed  to  school  inspection.  Likewise  in  supply  ac- 
counts, there  was  nothing  to  show  what  proportions  of  the 
supplies  consumed  were  charged  to  different  activities.  It 
is  true  that  sometimes  the  supplies  were  charged  to  the  dif- 
ferent activities  for  which  they  were  bought,  but  even  then, 
the  accounts  would  not  indicate  the  true  condition  of  the  ex- 
penditure, by  virtue  of  the  fact  that  there  might  still  be  in 
store  a  considerable  quantity  of  supplies  unconsumed.  The 
l30oks  of  the  departments  showed  money  paid  out  for  sup- 
plies purchased,  not  for  supplies  used  or  consumed.  From 
the  financial  records  used  in  August,  1906,  no  exact  and  ac- 
curate data  could  be  gathered  as  to  the  cost  of  different 
activities  conducted  by  the  health  department." 

IV.  Indefinite  Statements  or  Explanations  Accompany- 
ing Depa7'tinent  Estimates. — Worse  than  all,  these  depart- 
mental guess-estimates,  which  originated  in  the  ambiguity 
of  records,  were  generallyaccompaniedby  very  inadequate 
statements  in  explanation  of  the  requests  made.     A  typical 

^  New  York  Bureau  of  ^Municipal  Research,  Making  a  Municipal 
Budget,  p.  10. 

'  Ibid.,  pp.  lo-ii. 


213]       SEGREGATION  OF  BUDGETARY  ESTIMATES  29 

example  of  such  a  statement  was  found  in  the  estimates  of 
the  health  department  for  the  year  1907.  It  is  as  follows: 
"'  The  increase  of  $39,600  for  medical  school  inspection,  a^ 
shown  above,  is  requested  to  pay  the  salaries  of  thirty-two 
new  medical  inspectors,  at  $1,200  each,  distributed  among 
the  various  boroughs,  as  indicated  above,  and  of  one  addi- 
tional nurse  at  $1,200,  in  the  borough  of  Manhattan.  These 
are  required  to  keep  pace  with  the  constantly  growing 
school  population  throughout  the  City."  ^  This  statement 
did  not  give  definite  reasons  for  requesting  thirty-two  in- 
spectors at  $1,200  each  and  one  additional  nurse  at  the  same 
rate.  There  was  nothing  to  show  the  result  of  the  service 
rendered  by  the  school  inspector  in  the  preceding  year  or 
years,  nor  was  there  anything  to  demonstrate  the  necessity 
of  any  additional  inspectors. 

B.  NECESSITY  OF  DOUBLE  SEGREGATION 

A  budget,  in  order  to  be  an  effective  instrument  of  con- 
trol over  departmental  expenditures,  must  be  segregated  as 
regards  both  the  function  to  be  performed  and  the  objects 
of  the  expenditure.  The  majority  of  municipal  functions 
are  discharged  through  the  rendering  of  personal  services 
and  the  consumption  of  materials  and  supplies.  When,  for 
example,  an  appropriation  is  requested  for  the  discharge 
of  a  particular  function  of  the  health  department,  say  milk 
inspection,  it  is  arrived  at  by  taking  up  the  different  ele- 
ments of  expenditure  involved  in  milk  inspection,  including 
salaries  and  wages,  supplies,  telephone  service,  repairs  to 
plant,  etc.  This  itemization  of  expenditures  enables  the 
public  officials  to  check  the  use  of  funds  originally  intended 
for  payment  for  personal  services,  for  the  purchase  of  sup- 

1  New   York   Bureau   of    Municipal    Research,    Making   a   Municipal 
Budget,  pp.  15-16. 


30  FINANCES  OF  THE  CITY  OF  NEW  YORK  [214 

plies,  materials  or  equipment,  etc.  New  York  City  has  first 
given  attention,  as  we  shall  presently  see.  to  controlling  the 
use  of  money  for  personal  services,  supplies  and  materials. 

Thus,  functional  segregation  must  be  supplemented  by  ex- 
pense segregation.  If  a  health  department  receives  a  lump- 
sum appropriation  divided  only  according  to  functions,  such 
as  child  hygiene,  contagious  disease  control,  food  inspection, 
etc.,  it  cannot  tell  from  such  a  mandate  how  much  of  the 
quota  devoted  to  child  hygiene  is  available  for  personal  ser- 
vice, how  much  for  materials  and  supplies,  etc.  In  such  a 
case,  a  tangled  confusion  of  jumbled  elements  of  expendi- 
ture would  still  exist.  Similarly,  if  the  department  re- 
ceived a  sum  divided  only  according  to  objects  of  expendi- 
ture, such  as  salaries  and  wages,  supplies,  etc.,  it  cannot 
tell  from  such  a  mandate  how  much  food  inspection  it  is 
supposed  to  perform  or  how  much  it  is  to  spend  upon  child 
hygiene,  etc.  It  is  therefore  clear  that  the  making  of  a  sci- 
entific budget  calls  for  two  important  requisites,  viz.,  func- 
tional and  expense  classifications.  They  must  go  hand  in 
hand,  or  else  no  good  result  can  be  achieved. 

C.    SEGREGATION    BY   FUNCTIONS 

By  functional  segregation  is  meant  the  functionalization 
of  appropriations  or  the  separate  statement  of  the  amounts 
provided  for  each  distinct  kind  of  work.  Scientific  budget- 
making  does  not  admit  of  the  voting  of  lump-sum  appro- 
priations for  a  dozen  different  kinds  of  work.  It  does  not 
allow  the  grouping  together  of  appropriations  for  two  or 
three  different  kinds  of  work  when  they  are  or  can  be  inde- 
pendently performed  and  are  susceptible  of  separate  ac- 
counting. Without  functional  segregation  is  it  possible  to 
make  a  choice  between  allowing  and  disallowing,  a  choice 
always  necessary  to  the  making  of  an  intelligent  appropria- 
tion?   Of  course  segregation  by  function  can  be  carried  to 


215]       SEGREGATION  OF  BUDGETARY  ESTIMATES  31 

undue  lengths.  It  should  be  carried  only  so  far  as  will  en- 
able the  budget-makers,  administrators  and  the  public  to 
gain  from  the  budget  a  definite  impression  of  the  quantity 
of  service  which  the  governmental  machinery  is  expected 
to  perform  and  the  amount  of  expenditure  involved. 

With  this  important  end  in  view,  the  New  York  City 
budget  has  been  classified  into  the  following  general  func- 
tions or  purposes : 

1.  General  Administration. 

2.  Legislative — Board  of  Aldermen  and  City  Clerk. 

3.  Judicial. 

4.  Educational. 

5.  Health  and  Sanitation. 

(a)  Department  of  Health,  etc. 

(b)  Bellevue  and  Allied  Hospitals. 

(c)  Department  of  Street  Cleaning. 

6.  Protection  of  Persons  and  Property. 

(a)  Police  Department. 

(b)  Fire  Department. 

(c)  Armory  Board,  etc. 

7.  Department  of  Correction,  etc. 

8.  Department  of  Public  Charities. 

9.  Board  of  Water  Supply. 

10.  Department  of  Water  Supply,  Gas  and  Electricity. 

11.  Borough  Presidents. 

12.  Public  Service  Commission. 

13.  Rapid  Transit  Construction. 

14.  Departm.ent  of  Bridges. 

15.  Department  of  Docks  and  Ferries. 

16.  Department  of  Parks,  etc. 

17.  Board  of  City  Record. 

18.  Board  of  Elections  and  County  Convassers. 

19.  Excise  Commission.^ 

*  This  classification  is  used  in  the  quarterly  financial  summaries 
issued  by  the  comptroller.  See  the  Financial  Summary  for  the  quarter, 
Jan.  I,  1913  to  March  31.  1913,  p.  3. 


32  FINANCES  OF  THE  CITY  OF  NEW  YORK  [216 

Each  of  these  main  functions  is  divided  into  sub-func- 
tions or  activities.  Space  does  not  permit  an  enumeration 
of  all  the  sub-functions  under  each  main  function.  For 
purpose  of  illustration,  I  submit  the  following  analysis  of 
the  lines  of  activity  of  the  department  of  health  which  con- 
stitute a  direct  public  service : 

The  Department  of  Health. 
Administration. 

General. 

Care  of  Buildings  and  Grounds. 
Vital  Statistics. 
Promoting  Public  Health. 

Child  Hygiene. 

Infant  and  Milk  Inspection. 

Infectious  Diseases. 

Sanitary  Inspection. 

Food  Inspection. 
Laboratory  Service. 

Research  and  Vaccine. 

Chemical. 

Drug. 
Hospital  Service. 

Willard  Parker  and  Reception. 

Riverside. 

Kingston  Avenue. 

Tuberculosis  Sanatorium. 

Laundry. 

Steamboats  and  Launches.^ 

The  duty  of  the  departlment  of  health,  as  defined  by  the 
charter,  consists  of  taking  suitable  measures  to  provide 
conditions  looking  "  to  the  preservation  of  human  life,  or 
to  the  care,  promotion  and  protection  of  health  "  in  the  City 
of  New  York.    It  is  important  to  lay  out  a  plan  showing  the 

^  Pp.  63-64,  Final  Budget,  1914. 


217]       SEGREGATION  OF  BUDGETARY  ESTIMATES  33 

lines  of  activity  in  which  the  department  is  engaged,  so 
that  the  piibhc  may  know  what  and  how  much  service  the 
department  is  rendering  for  the  purposes  above  stated. 
Thus  milk  inspection  is  a  health  activity,  recognized  to  be 
indispensable  to  the  supply  of  pure  milk ;  the  crusade  against 
tuberculosis  is  another;  and  the  prohibition  on  the  sale  of 
impure  drugs,  meats  and  other  foods,  is  a  third.  The  de- 
partment has  a  multitude  of  other  activities  which  it  finds  it 
difficult  to  undertake,  owing  to  the  fact  that  the  depart- 
ment's activities  are  necessarily  restricted  to  the  funds  ap- 
propriated. It  is  fair  to  say,  however,  that  the  functions 
now  performed  by  the  department  are  a  manifestation  of 
its  judgment  as  to  the  measures  most  directly  related  to  the 
public  health. 

D.   SEGREGATION   BY  OBJECTS  OF  EXPENDITURE 

I.  Method  of  Segregation. — Segregation  by  objects  of 
expenditure  or  expense  segregation  is  so  intimately  related 
to  functional  segregation  that  in  discussing  it  in  this  sec- 
tion I  shall  often  have  occasion  to  refer  also  to  the  other. 
As  stated  in  the  preceding  chapter,  the  diversion  of  funds 
to  purposes  other  than  those  for  which  they  were  originally 
appropriated  has  heretofore  been  rendered  comparatively 
easy,  through  lump-sum  appropriations.  The  New  York 
City  budget  of  1905  furnishes  many  striking  examples  of 
such  appropriations,  of  which  the  following  is  one : 

For  salaries  of  professors,  tutors,  and  others  in  the  Normal 
College  and  in  the  Training  Department  of  the  Normal  Col- 
lege ;  for  scientific  apparatus,  books  and  all  necessary  supplies 
therefor;  for  repairing  and  altering  the  college  building,  and 
for  the  support,  maintenance  and  general  expenses  of  the  same, 
pursuant  to  section  1142  of  the  Greater  New  York  Charter 
— $220,000. 


34  FINANCES  OF  THE  CITY  OF  NEW  YORK  [218 

The  total  appropriation  for  the  Noniial  College  of  the 
City  of  New  York  is  thus  presented  as  one  item. 

There  can  be  no  justification  for  making  such  appropria- 
tions. They  are  so  comprehensive  and  so  indefinite  that  it 
is  almost  impossible  to  secure  an  adequate  accounting  and 
auditing  control.  Such  general  appropriations  might  be  ex- 
pended for  almost  anything.  If  reports  of  expenditures 
are  grouped  in  such  general  terms,  they  would  give  very 
little  information  to  taxpayers  as  to  the  actual  costs. 

Instead  of  allowing  a  lump  sum  to  each  department,  a 
limit  should  be  placed  upon  the  amount  of  each  appropria- 
tion which  may  be  used  for  different  objects,  such  as  sal- 
aries and  wages,  other  services,  supplies,  etc. ;  otherwise 
excessive  amounts  mav  be  used  for  increasino-  the  number 
and  size  of  salaries  or  be  diverted  into  the  hands  of  favored 
dealers  in  materials,  equipment  and  supplies.  In  other 
words,  the  amount  must  be  segregated,  in  order  to  consti- 
tute a  basis  for  administrative  control,  and  if  the  segrega- 
tion is  done  according  to  a  uniform  classification,  to  be 
adopted  as  a  standard  and  not  to  be  deviated  from  in  the 
succeeding  years,  it  may  form  a  real  basis  for  the  develop- 
ment of  statistical  data  affording  comparison  of  much  eco- 
nomic value.  This  plan  is  now  followed  by  the  City  of  New 
York,  whose  annual  budget  is  so  segregated  as  to  reduce  to 
a  definite  fixed  classification  all  of  the  objects  of  expendi- 
ture for  which  the  city  spends  money.  These  are  gener- 
ally called  standard  accounts.  This  having  been  done,  the 
next  step  is  to  ascertain  what  public  services  are  to  be 
secured  by  the  expenditure.  These  services,  known  as 
"  functions ",  are  shown  in  the  annual  budget  grouped 
under  departments  and  other  organization  units.  For  in- 
stance, under  the  health  department  would  be  grouped 
such  functions  as  milk  inspection,  sanitary  inspection,  child 
hygiene,  etc. 


219]       S  EG  REG  A  TION  OF  B  UDGE  TA  R  Y  ES  TIM  A  TES  3  5 

By  means  of  such  an  arrangement,  a  clear  and  compre- 
hensive picture  of  the  various  municipal  functions  and  ac- 
tivities is  obtained,  and  a  basis  is  made  available  for  judg- 
ing- intelligently  the  adequacy  or  inadequacy  of  appropria- 
tions. Not  only  are  the  appropriations  for  each  function 
shovi^n  thereby,  but  also  what  amount  of  money  must  be 
provided  in  order  that  such  functions  may  be  performed. 

As  already  pointed  out  above,  the  most  important  thing 
to  be  borne  in  mind  in  making  such  an  arrangement,  is  that 
the  classification  or  segregation  shall  be  adopted  as  standard 
and  not  deviated  from  thereafter,  on  account  of  the  increas- 
ing usefulness  afforded  by  comparisons  between  functions, 
sub-functions,  and  objects  of  expenditure  from  year  to 
year.  It  should  also  be  made  compulsory  either  by  ordi- 
nance or  by  charter  provisions  for  the  appropriating  officials 
to  make  the  annual  budget  according  to  the  standard 
adopted. 

In  addition  to  making  possible  comparisons  between  cor- 
responding appropriations  from  year  to  year  and  to  silnpli- 
fying  and  improving  the  accounting,  auditing  and  reporting 
methods,  the  adoption  of  a  segregated  budget  makes  it  very 
difficult  to  request  money  for  various  and  indefijiitely  stated 
purposes. 

The  classification  under  which  the  objects  of  expenditure 
of  the  City  of  New  York  are  logically  grouped  in  the  1914 
budget  is  as  follows : 

A.  Personal  Service. 

1.  Salaries,  regular  employees. 

2.  Salaries,  temporary  employees. 

3.  Wages,  regular  employees. 

4.  Wages,  temporary  employees. 

B,  Supplies. 

I.  Food  Supplies. 


36  FINANCES  OF  THE  CITY  OF  NEW  YORK  [220 

2.  Forage  and  Veterinary  Supplies. 

3.  Fuel  Supplies. 

4.  Office  Supplies. 

5.  Medical  and  Surgical  Supplies. 

6.  Laundry,  Cleaning  and  Disinfecting  Supplies. 

7.  Refrigerating  Supplies. 

8.  Educational  and  Recreational  Supplies. 

9.  Botanical  and  Agricultural  Supplies. 

10.  Motor-vehicle  Supplies. 

11.  General  Plant  Supplies. 

C.  Materials. 

1.  Highway  Materials. 

2.  Sewer  Materials. 

3.  Building  Materials. 

4.  General  Plant  Materials. 

D.  Equipment. 

1.  Office  Equipment. 

2.  Household  Equipment. 

3.  Medical  and  Surgical  Equipment. 

4.  Live  Stock. 

5.  Motorless  Vehicles  and  Equipment. 

6.  Motor  Vehicles  and  Equipment. 

7.  Wearing  Apparel. 

8.  Educational  and  Recreational  Equipment. 

9.  General  Plant  Equipment. 

E.  Contract  or  Open  Order  Service. 

1.  General  Repairs 

2.  Motor  Vehicle  Repairs. 

3.  Light,  Heat  and  Power. 

a.  Lighting  streets  and  parks. 

b.  Lighting  public  buildings. 

c.  Power. 

d.  Heat. 

4.  Janitorial  Service. 

5.  Transportation  Service. 

a.  Hire  of  horses  and  vehicles  with  drivers. 


221  ]      SEGREGATION  OF  BUDGETARY  ESTIMATES  37 

b.  Hire  of  horses  and  vehicles  without  drivers. 

c.  Storage  of  motorless  vehicles. 

d.  Storage  of  motor  vehicles. 

e.  Shoeing    and    boarding    horses,    including 

veterinary  service. 

f.  Hire  of  automobiles. 

g.  Carfare. 

h.  Expressage  and  deliveries. 

6.  Communication. 

a.  Telephone. 

b.  Telegraph,  cable  and  messenger  service. 

7.  General  plant  service. 

F.  Fixed  Charges  and  Contributions. 

1.  Debt  Service. 

2.  Rents. 

3.  Pensions. 

4.  Insurance. 

5.  Care  of  Dependents  in  Private  Institutions. 

6.  State  Tax. 

7.  Advertising. 

G.  Contingencies.^ 

II.  The  Personal  Service  Group. — (a)  Salaries  and 
Wages  Classified.  The  salries  and  wages  of  officials  and 
employees  represent  a  very  large  part  of  the  city's  budget, 
often  ranging  from  one-half  to  two-thirds  of  the  total. 
Until  recently  the  appropriations  for  salaries  and  wages 
have  been  tainted  with  corruption  and  graft,  as  a  result  of 
the  failure  of  the  appropriating  body  to  provide  for  ade- 
quate control  over  them.  To  prevent  as  far  as  possible  the 
diversion  and  misuse  of  salary  and  wage  appropriations, 
they  are  now  classified,  as  shown  above,  into  four  general 
groups,  viz. : 

^  Scientific  Budget  Making  vs.  Rule  of  Thumb  Budget  Making,  p.  4. 


38  FINANCES  OF  THE  CITY  OF  NEW  YORK  [222 

1.  Salaries,  regular  employees. 

2.  Salaries,  temporary  employees. 

3.  Wages,  regular  employees. 

4.  Wages,  temporary  employees. 

Groups  I  and  3  represent  the  salaries  and  wages  provided 
for  employees  employed  during  the  entire  year,  irrespec- 
tive of  season  or  weather  or  the  quantity  or  exigency  of  the 
service  to  be  rendered.  Groups  2  and  4  represent  salaries 
and  wages  provided  for  employee^  employed  for  a  short 
period  of  time,  their  service  being  dependent  upon  season, 
weather  or  the  quantity  or  exigency  of  the  work  to  be  done. 

Under  Groups  i  and  3  are  listed  according  to  rank  all 
the  employees  and  the  rate  and  amount  provided  for  each 
class  and  grade.  For  example,  the  employees  may  be  listed 
under  salaries,  regular  employees,  as  follows: 

Personal  Service 

75.  Salary  of  the  comptroller   $i5,ocx).oo 

Salaries,  regular  employees 

Executive  and  Advisory 

76. Administration 

Deputy  comptroller,  2  at  $7,500 $15,000.00 

Assistant  Deputy  Comptroller   6,000.00 

Secretary  to  the  department  6.000.00 

Clerk  to  the  comptroller 2,100.00 

Stenographer   to  comptroller   1,500.001 

Under  wages,  regular  employees,  the  following  appears 
in  the  191 4  budget:  - 

Automobile  Machinist,  2  at  $4.50  per  day  (303  days) . .  $2,727.00 

Tinsmith,  i  at  $5.00  per  day  (303  days) 1,515.00 

Laborer,  2  at  $2.50  per  day  (303  days)    1,515.00 

Total    $5,757.00 

*  See  Budget,  1914,  schedule  76,  p.  157,  under  Department  of  Finance. 

•  Ihid.,  for  Bureau  of  Licenses,  schedule  262,  p.  177. 


223]       SEGREGATION  OF  BUDGETARY  ESTIMATES  ^g 

Similarly,  under  Groups  2  and  4  would  be  listed  each 
class  and  grade  and  rate  of  compensation.  Instead,  how- 
ever, of  showing  the  number  of  incumbents  in  each  class, 
the  schedule  would  show  the  time  of  service  based  upon  the 
estimated  '"  mean  "  days,  weeks,  or  months  required  for 
each  class  and  grade  of  service.  For  instance,  the  19 14  bud- 
get ^  lists  the  following  items  under  salaries,  temporary  em- 
ployees : 

Bookbinder  at  $1,200  per  annum  (8  months) $800.00 

Stenographer  and  Typewriter  at  $goo  per  annum  (55  months) .  4,125.00 

Clerk  at  $900  per  annum  ( i  month)    75.00 

Tabulating  machine  operator  at  $780  (3  months)    IQS-Oo 

Schedule  Total   $5,195.00 

And  under  wages,  temporary  employees,  are  listed  the 
following :  " 

Stenographer  at  $3.00  per  day  ( 18  days)    $54.00 

Clerk  at  $3.00  per  day  (25  days)   75-00 

Typewriting  accountant  at  $20  per  week  (8  weeks) ....     160.00 

Schedule  Total   $289.00 

Any  such  arrangement  as  this  serves  to  give  sufficient 
option  to  the  departmental  heads,  because  it  admits  of 
changes  in  the  use  of  the  appropriations  for  temporary  em- 
ployees according  as  the  circumstances  may  demand.  He 
could,  for  example,  engage  two  lx)okbinders  at  $1,200  per 
annum  for  four  months,  or  four  bookbinders  at  $1,200  for 
two  months,  or,  in  the  case  of  wages,  two  stenographers  at 
$3.00  per  day  for  nine  days,  or  one  stenographer  at  $2.00 
per  day  for  twenty-seven  days.  In  this  way  he  has  a  con- 
siderable range  of  choice  in  regard  to  the  number  of  em- 
ployees and  length  of  service,  provided  the  total  number  of 

'  1914  Budget,  schedule  88,  p.  164. 
*  Ibid.,  schedule  in,  p.  165. 


40  FINANCES  OF  THE  CITY  OF  NEW  YORK  [224 

work  units  expressed  in  days,  weeks,  or  months,  be  not  ex- 
ceeded. The  granting  of  this  discretionary  power  to  the 
departmental  heads  lessens  in  a  measure  the  objection  that 
he  is  so  tied  down  as  to  lose  his  entire  discretion  in  the 
spending  of  the  budgetary  appropriations  for  employees. 
Another  source  of  elasticity  in  the  application  of  appropria- 
tions is  found  in  the  mter  sc  transfer,  which  is  later  dis- 
cussed. 

(b)  Inequalities  in  Salaries  and  Wages.  Despite  the  ex- 
cellent effects  of  the  schedule  segregation  of  salary  and 
wage  items  in  the  budget,  serious  abuses  continue  to  defeat 
the  purpose  of  budget  segregation,  notably  in  the  matter  of 
increases  of  salaries.  The  method  of  making  an  increase  is 
twofold:  (i)  the  salaries  of  employees  discharged  or 
dropped  are  divided  among  the  favorite  employees,  and 
(2)  some  employees  are  transferred  from  the  budget  to 
corporate  stock  payrolls  where  they  are  given  higher  sal- 
aries, which  remain  the  same  even  if  the  employees  are  re- 
stored to  the  budget  payrolls  in  the  next  year.  Consequentl}» 
inequalities  in  remuneration  for  similar  services  continue  to 
exist,  and  become  a  source  of  great  discouragement  among 
the  desennng  but  unrewarded.  A  preliminary  investigation 
conducted  by  the  Bureau  of  Municipal  Research  has  devel- 
oped the  fact  that  in  the  clerical  service  comparisons  of 
some  2,000  salaries  showed  a  salary  range  of  $300  to  $2,100 
in  one  grade  Avhere  the  same  quality  of  work  was  per- 
formed; in  another  grade,  from  $600  to  $2,400.  and  in  a 
third  grade  from  $1,200  to  $4,000.^  The  demoralizing  ef- 
fect of  such  inequalities  can  hardly  be  overestimated. 

With  the  above  findings  as  a  basis,  it  is  estimated  by  the 

1  Report  of  Committee  on  Finance  and  Currency,  appointed  by  the 
Chamber  of  Commerce  of  New  York,  on  the  Progress  of  the  New- 
Accounting  System  in  the  Finance  Department  in  the  City  of  New- 
York,  Oct.  3,  1912,  pp.  ig-20. 


225]       SEGREGATION  OF  BUDGETARY  ESTIMATES  41 

Bureau  of  jMunicipal  Research  that  from  $5,000,000  to  $7,- 
000,000  could  be  saved  tO'  the  city  annually  if  the  salaries 
and  wages  were  standardized/  The  departmental  estimates 
for  1 91 3  showed  an  allowance  for  salary  and  wage  increases 
and  added  force  of  $20,000,000.  The  comptroller  advo- 
cated that  the  increases  of  salaries  and  wages  which  would 
become  permanent  charges  against  the  city  should  be  post- 
poned until  the  important  readjustment  involved  in  stand- 
ardization is  completed.  In  the  making  of  the  1914  bud- 
get, the  same  policy  was  followed,  except  that  several  hun- 
dred salaries  were  increased  for  meritorious  underpaid  ser- 
vice." 

Salaries  and  wages  cost  the  city  about  $91,000,000  in 
1912,  or  over  50  per  cent  of  the  total  charge  for  operation, 
including  some  $50,000,000  for  the  debt  service.^  This  sum 
for  salaries  and  wages  covers  those  paid  out  of  the  proceeds 
of  the  sale  of  corporate  stock  as  well  as  those  paid  out  of 
the  tax  levy.  The  reason  why  salaries  are  partly  paid  out 
of  corporate  stock  is  because  the  men  receiving  them  may 
be  engaged  partly  in  construction  work,  which  is  charged  to 
corporate  stock.  For  example,  an  engineer  drawing  plans 
for  a  new  bridge  is  paid  out  of  the  cost  of  the  bridge  which, 
being  a  construction  work,  is  charged  to  a  corporate  stock 
fund,  but  the  time  spent  on  drawing  plans  to  repair  an  old 
bridge  is  paid  for  out  of  the  tax-levy  budget.  As  payrolls 
represent  the  largest  item  in  the  budget,  and  as  salaries  have 
been  fixed  and  are  paid  without  any  plan  of  equalization,  it 
is  obvious  that  the  payrolls  afford  the  greatest  opportunity 
for  increased  economy  and  efficiency. 

''^  Report  of  Committee  on  Finance  and  Currency,  op.  £it. 

*  Leaflet  entitled  Budget  Reminders  and  Remainders,  issued  by  the 
New  York  Bureau  of  Municipal  Research,  Nov.  i,  1913. 

*  Tracing  Tax  Increase  to  the  Payroll,  hsued  by  the  New  York  Bureau 
of  ^Municipal  Research,  July  26,  1913. 


42  FINANCES  OF  THE  CITY  OF  NEW  YORK  [226 

(c)  The  Standardization  of  Salaries  and  Wages.  In  order 
to  correct  the  inequalities  in  the  salaries  paid  to  the  city 
employees,  a  committee  on  standardization  was  appointed 
early  in  the  first  year  of  the  Gaynor  administration.  The 
task  delegated  to  this  committee  by  the  board  of  estimate 
and  to  the  sub-committee  by  the  committee,  was  to  devise 
and  carry  out  a  plan  for  the  standardization  of  salaries  paid 
for  work  of  equal  value.  The  essentials  to  the  carry- 
ing out  of  this  plan  are  as  follows : 

1.  A  detailed  and  intimate  knowledge  of  the  kind  of  work 
being  done  by  every  city  employee. 

2.  A  definite  classification  and  exact  description  of  the  kinds 
of  work  being  done. 

3.  A  determination  of  the  fair  value  of  the  different  kinds 
of  work  in  the  city  service. 

4.  The  functions  of  all  city  departments. 

5.  The  existing  methods  of  performing  these  functions. 

6.  The  formulation  of  recommendations. 

( I )  SenAce  Record  Cards. — Sets  o  f  cards  were  prepared 
to  record  such  information  as  will  afford  every  facility  for 
comparison  of  positions.  The  civil  service  records  of  ap- 
proximately 38,000  city  employees  had  been  transcribed 
from  the  cards  of  the  municipal  civil  service  co^nmission. 
About  20,000  of  these  cards  have  been  made  a  subject  of 
study,  including  examination  and  appraisal.  The  study  was 
carried  so  far  that  the  examiners  obtained  an  exact  descrip- 
tion of  the  kinds  of  work  being  done  by  the  individual  em- 
ployees. This  description,  made  by  the  employees  them- 
selves, approved  by  the  men  in  charge  of  them,  the  exam- 
iners, and  the  departmental  committees  appointed  to  co' 
operate  with  the  sub-committee,  gives  a  full  and  accurate 
account  of  the  quality  of  the  average  day's  work  of  every 
individual  employee. 


227]       SEGREGATION  OF  BUDGETARY  ESTIMATES  43 

(2)  Serzicc  Classificaiion. — While  the  work  of  examina- 
tion and  appraisal  was  still  going  on,  the  entire  employment 
of  the  city  government  was  segregated  into  sixteen  grand 
divisions,  such  as  administrative,  clerical,  engineering,  in- 
vestigation, etc.  Each  of  these  divisions  was  divided  into 
groups  and  classes,  and  each  of  these  classes  into  sub-classes. 

(3)  Market  Value  of  Work. — This  is  obtained  by  cor- 
responding with  hundreds  of  large  corporations  where  sim- 
ilar kinds  of  work  are  being  done.  The  questions  asked 
contained  the  exact  description  of  the  different  classes  of 
employees.  To  illustrate,  instead  of  asking  "  What  do  you 
pay  clerks?  ".  the  committee  asked,  "  What  do  you  pay  for 
such  work  as  is  described  in  the  different  classes  of  the  clerk 
group?"  A  tentative  appraisal  was  taken  on  the  basis  of 
the  information  obtained,  showing  an  average  difference 
in  compensation  of  15  per  cent  to  25  per  cent  in  favor  of 
the  city  employee. 

(4)  Functional  Organization  Charts. — There  have  been 
completed  or  are  in  process  of  being  drafted,  more  than 
four  hundred  functional  organization  charts,  showing  "  the 
organic  relations  between  bureaus,  divisions  and  the  work- 
ing units  in  every  department  ",  the  activities  of  city  gov- 
ernment undertaken  by  each  department  and  the  manner 
in  which  they  are  carried  on.  These  charts  are  designed 
to  afford  an  adequate  basis  for  comparison  of  method,  for 
investigations  of  results  in  connection  with  working  force. 
They  are  also  to  be  used  in  disclosing  duplications  or  par- 
tial duplications  of  functions. 

(5)  Tentative  Appraisal  of  Values  of  Positions. — No  at- 
tempt was  made  during  the  first  six  months  of  191 3  to  set 
values  upon  individuals.  Later  in  the  year,  as  soon  as  suf- 
ficient data  were  collected  for  this  purpose,  a  staff  of  ex- 
aminers was  organized  to  make  a  tentative  valuation  of  the 
existing  positions.     They  made  a  careful  study  of  the  card 


^^  FINANCES  OF  THE  CITY  OF  NEW  YORK  [228 

descriptions  of  work,  held  informal  discussions  among 
themselves,  and  with  the  directors  under  whom  they  worked, 
compared  them  with  each  other,  and  whenever  they  found 
the  data  incomplete  or  inadequate,  obtained  additional  in- 
formation from  various  sources.  The  way  in  which  they 
appraised  the  values  of  the  existing  positions  was  by  devis- 
ing a  code,  representing  by  alphabetical  symbols  the  ser- 
vice, group,  class,  and  sub-class  of  all  employments.  "  With- 
out the  slightest  reference  to  name,  age.  civil  service  title, 
or  existing  salary  of  the  person  whose  card  was  being  con- 
sidered, it  was  assigned  by  the  appraisers  to  the  place  in 
the  classification  where  it  naturally  fell."  The  appraisers 
were  utterly  ignorant  of  the  money  values  attached  to  the 
code  symbols  which  they  used.  In  case  of  doubt,  the  di- 
rectors were  consulted.  Tentative  values  were  listed  and 
compared  with  the  existing  salaries.  Any  disparity  between 
the  tw^o  of  $300  or  more  was  noted.  These  tentative  ap- 
praisals are,  however,  not  regarded  by  the  director  as  final. 
They  will  merely  serve  as  a  ground  work  for  future  inten- 
sive studies  in  the  departments. 

(6)  Recommendations. — It  is  the  quantity  of  the  work 
of  a  given  kind  done  by  every  individual  employee  that 
should  determine  his  rate  of  compensation.  In  order  to 
measure  the  quantity  of  the  w^ork  an  employee  is  doing,  it 
is  essential  to  study  it  in  relation  to  the  method  by  which 
the  function  of  which  he  is  a  working  unit  is  being  per- 
fonned  within  a  department.  For  under  a  bad  method,  he 
may  be  doing  an  unnecessary  amount  of  work  having  no 
practical  value  to  the  city.  The  sub-committee  on  standard- 
ization recommends  that  from  now  on  the  studies  of  the 
quantity  of  work  being  done  by  each  individual  employee 
and  the  methods  employed  by  the  different  departments  in 
performing  their  functions,  should  be  taken  up.  It  will 
then  be  possible  to  make  a  fairly  accurate  estimate  of  the 


229]       SEGREGATION  OF  BUDGETARY  ESTIMATES  45 

quantity  of  work  required  by  every  separate  function,  and 
to  secure  a  fair  day's  work  from  every  employee.  Dubious 
and  indirect  procedure  will  give  way  to  the  simple  and  di- 
rect; and  duplications  or  partial  duplications  of  function  will 
be  disclosed  and  corrected.  The  sub-committee  also  recom- 
mends that  a  uniform  system  of  measuring  and  recording 
currently  the  w^ork  done  by  each  working  unit  should  be 
devised  and  maintained  in  all  city  departments  as  well  as  in 
a  central  bureau  which  mav  be  under  the  direction  of  the 
Board  of  Estimate  and  Apportionment.  Such  a  recording 
system  would  afford  a  basis  for  all  salary  increases  and  pro- 
motions.^ Further,  the  evil  practice  which  has  been  toler- 
ated in  New  York  City  of  reporting  men  working  on  two 
different  squads  at  the  same  time "  and  of  detailing  city  em- 
ployees to  work  for  private  firms  in  which  some  higher 
officials  are  interested,  although  they  receive  full  compensa- 
tion from  the  city,"  can  be  easily  detected  and  remedied. 

It  is  thus  clear  that  salary  increases  will  hereafter  be 
fixed  not  by  guess-estimates  but  by  estimates  based  on  spe-* 
cific  knowledge  of  about  38,000  jobs.  It  is  imjDortant  to 
note  here  that  the  descriptions  of  38,000  jobs,  together  with 
the  facts  regarding  the  nature,  grade,  etc.,  of  each  joby. 
which  were  collected  from  employees  and  officers  them- 
selves, w^ere  sent  back  for  confirmation  or  modification  in 
the  light  of  other  i[x)ssible  facts,  after  they  were  confirmed 
or  modified  by  responsil^le  departmental  officers.     The  as- 

^  The  work  of  standardizing  salaries  and  grades  has  just  made  a 
good  start,  f'or  that  reason,  there  is  not  much  written  information  on 
this  subject.  This  part  is  entirely  based  upon  the  unpublished  report 
of  the  sub-committee  to  the  Committee  on  Standardization  of  Salaries 
and  Grades,  1914. 

2  Bureau  of  Municipal  Research,  Report  on  an  Investigation  of  the 
Office  of  the  Commissioners  of  Accounts,  Xezt'  York  City,  1907,  p.  12. 

'  Ibid.,  p.  27. 


46  FINAXCES  OF  THE  CITY  OF  NEW  YORK  [230 

semblage  of  all  these  facts  in  one  place  cannot  fail  to  con- 
stitute a  fairly  accurate  basis  for  the  standardization  and 
increases  of  salaries.  Unless  salaries  are  based  upon  the 
value  of  work  done,  there  is  very  little  hope  for  a  radical 
increase  of  work  accompanied  by  a  radical  decrease  in  cost. 

III.  Materials,  Supplies  and  Equipment. —  (a)  Definition 
and  Classification.  Heretofore  there  has  been  a  good  deal 
of  confusion  arising  from  the  lack  of  distinct  dividing  lines 
between  supplies,  on  the  one  hand,  and  materials,  on  the 
other,  and  between  supplies,  on  the  one  hand,  and  furniture 
and  fittings,  on  the  other.  The  term  "supplies"  has  been  un- 
duly stretched  to  represent  everything  from  a  postage  stamp 
to  an  automobile;  indeed,  it  is  a  fact  that,  heretofore,  post- 
age stamps  have  been  purchased  from  the  same  account  as 
the  materials  for  making  sewers  and  repairing  highways, 
although  it  was  obvious  that  there  was  no  relation  whatever 
between  sewer  and  highway  materials  and  postage  stamps. 

An  effort  has  been  made  to  correct  this  condition  by  an 
arbitrary  distinction  of  ''  Furniture  and  Fittings  "  as  one 
class.  "  Apparatus,  Machinery  and  Vehicles  "  as  another 
class.  "  Supplies  and  Materials  "  as  a  third  class,  and  "Auto- 
mobiles "  as  still  another  class.  This  separation  into  classes 
did  not  place  in  each  class  the  articles  that  properly  belonged 
there.  In  one  case,  for  instance,  a  typewriter  or  an  adding 
machine  would  be  classified  as  "  Apparatus  and  jNIachinery," 
and  in  another  case  it  would  be  classified  as  "  Furniture  and 
Fittings,"  and  in  still  another  case  as  "  Supplies  and  Ala- 
terials."  In  general,  an  effort  was  made  to  place  those  little 
articles  of  transient  use  or  articles  that  last  for  a  short  time 
in  the  "  Supplies  and  Materials  "  classification.  This  was 
logically  sound,  but  there  was  no  definite  rule  by  which  the 
articles  could  be  classified,  because  in  some  cases  articles 
that  have  a  transient  life  in  some  ofiices  would  endure  for 
years  in  other  offices. 


231]       SEGREGATION  or  BUDGETARY  ESTIMATES  47 

The  result  of  the  failure  to  make  proper  distinct  lines  of 
separation  or  classification  was  an  abuse  of  appropriations. 
To  illustrate,  an  automobile  would  be  paid  for  from  an  ac- 
count intended  for  an  entirely  different  purpose.  "  The 
bureau  of  audit,  department  of  finance,  could  never  be 
sure  when  the  cost  of  an  article  was  properly  chargeable  to 
an  account  to  which  it  had  been  charged." 

It  was  found  necessary  to  create  arbitrary  dividing  lines 
in  order  to  establish  classifications  under  which  all  articles 
can  be  properly  grouped.  These  classifications  are,  of 
course,  useless  without  proper  definitions.  The  following 
definitions  have  been  adopted  :  ^ 

"  Supplies  are  articles  which  can  be  used  but  once,  or 
which,  after  being  used  once,  show  a  material  change  in  or 
an  appreciable  impairment  of  their  physical  condition." 

"  Equipment  includes  all  apparatus,  machinery,  vehicles, 
tools,  instruments,  furniture,  fittings,  and  other  articles 
which  can  be  used  over  and  over  again  without  a  material 
change  in  or  an  appreciable  impairment  of  their  physical 
condition." 

"  Materials  are  articles  and  substances  in  a  natural  or 
manufactured  state  entering  into  the  construction  or  repair 
of  any  building,  highway,  sewer,  apparatus,  machinery,  or 
other  equipment." 

In  the  case  of  supplies  there  is  an  exception  to  the  gen- 
eral rule.  This  concerns  the  stationery,  chiefly  because  prac- 
tically all  stationery  is  furnished  by  the  City  Record,  and 
partly  because  the  term  "  Stationery  Supplies  "  has  such  a 
definite  meaning  that  the  rule  could  not  be  applied  without 
doing  violence  to  the  general  practice.  Many  things  which 
are  in  the  nature  of  equipment,  and  endure  for  years  are 

1  Cf.    Budget    Classification    to    be    used    for    1915,    Department    of 
Finance,  p.  2. 


48  FINANCES  OF  THE  CITY  OF  NEW  YORK  [232 

classified  and  supplied  by  the  City  Record  as  "  Stationer}- 
Supplies."  This  exception,  however,  does  not  affect  many 
departments  in  the  city. 

The  three  broad  classifications  were  further  segregated 
in  making  appropriations.  The  supplies  classification  is 
segregated  into  eleven  sub-classifications,  the  equipment 
classification  into  nine  sub-classifications,  and  the  materials 
classification  into  four  sub-classifications,  as  shown  on  page 
36. 

Thus,  the  distinction  that  has  been  made  between  sup- 
plies on  the  one  hand  and  equipment  on  the  other  makes 
clear  thinking  and  proper  classification  possible.  To  the 
mind  of  the  average  man  anything  supplied  is  a  supply. 
The  so-called  supply  bills  passed  by  the  legislature  include 
things  that  are  in  the  nature  of  equipment.  In  some  cases, 
even  the  heavy  sort  of  equipment,  available  for  the  construc- 
tion of  buildings,  is  grouped  under  supplies.  This  loose 
meaning  of  the  term  "  supplies  "  has  done  more  than  any- 
thing else  to  prevent  a  satisfactory  classification  of  bud- 
getary provisions  for  other  than  personal  service.  When 
the  old,  loose  methods  of  thinking  and  classifying  are  re- 
placed by  the  new  ones,  a  clear  distinction  between  supplies 
and  equipment  will  become  possible.  A  typewriter  ribbon  can 
be  used  more  than  once,  but  it  cannot  be  used  at  all  with- 
out physical  impairment  of  its  condition.  It  is  therefore 
properly  chargeable  to  a  supply  account.  On  the  other  hand, 
typewriters  can  be  used  over  and  over  again,  and  as  a 
matter  of  fact,  they  are  used  for  trial  before  they  are  sold. 
The}^  are  therefore  properly  chargeable  to  an  equipment  ac- 
count. 

In  the  New  York  budget  distinct  lines  are  drawn,  not 
only  between  supplies  and  equipment,  but  also  between  dif- 
ferent kinds  of  supplies  and  different  kinds  of  equipment. 
To  illustrate,  medical  and  surgical  supplies — under  grand 


233]       SEGREGATION  OF  BUDGETARY  ESTIMATES  49 

classification  B.  supplies,  p.  36 — consist  chiefly  of  medi- 
cines, bandages  and  little  articles  that  are  used  once  in  the 
treatment  of  or  operation  upon  a  patient  and  then  thrown 
away.  Whiskey,  wines,  alcohol,  or  other  spirituous  liquors, 
which  in  previous  years  would  have  been  included  in  food 
supplies,  are  now  included  in  medical  and  surgical  supplies. 
The  departments  or  other  organization  units  like  hospitals 
are  not  allonved  to  charge  them  to  a  food  supply  account. 

Besides  the  three  grand  classifications  mentioned  above, 
there  are  three  others,  vis.,  contract  or  open  order  service, 
fixed  charges  and  contributions  and  contingencies.     There 
are  seven  sub-classifications  under  contract  or  open  order 
service  and  seven  under  fixed  charges  and  contributions. 
They  are  all  self-explanatory.    In  the  case  of  contingencies, 
however,  a  few  words  are  necessary  in  order  to  point  out 
the  great  advance  that  has  been  made.   Contingency  accounts 
before  191 3  were  abused  more  than  any  other  accounts  in 
the  budget.     Things  for  which  the  appropriating  body  re- 
fused to  grant  appropriations  were  bought  and  paid  for 
from  the  contingency  accounts.     Salaries  were  charged  to 
contingency  accounts  in  violation  of  the  charter  require- 
ments and  of  the  rule  of  the  board  of  estimate  and  ap- 
portioment.    Furthermore,  things  that  constitute  the  contin- 
gency accounts  are  things  not  contingencies.     By  contin- 
gencies we  mean  the  things  or  needs  that  cannot  be  fore- 
seen, but  until  19 1 3  no  attempt  was  made  to  draw  a  dis- 
tinct line  between  things  for  which  a  need  was  foreseen 
and  those  for  which  it  was  not.    On  this  account  it  had  been 
the  practice  for  the  departments  to  include  in  contingency 
accounts  provisions  for  the  purchase  of  large  quantities  of 
furniture,  notwithstanding  the   fact  that  the  departments 
had  furniture  accounts.^ 

1  Budget  Classifications,  191 5,  p.  8. 


50  FINANCES  OF  THE  CITY  OF  NEW  YORK  [2^4 

In  the  1 9 14  budget,  a  remarkable  advance  was  made  over 
the  former  years.  The  contingency  accounts  are  not  per- 
mitted to  be  stretched  to  cover  things  that  are  not  real  con- 
tingencies. Departments  are  instructed  to  be  very  careful 
not  to  buy  things  out  of  the  contingency  appropriations  un- 
less they  are  real  contingencies. 

(b)  Estimates  Rendered  Inaccurate  by  the  Decentralized 
System  of  Purchasing  Supplies.  Notwithstanding  the  fine 
distinctions  that  have  been  made  between  supplies  and  ma- 
terials or  between  supplies  and  equipment,  it  is  still  impos- 
sible for  the  makers  of  the  New  York  City  budget  to  get 
accurate  departmental  estimates  of  supply  requirements, 
owing  to  the  confused  condition  in  which  records  are  main- 
tained in  most  city  storehouses.  Consequently,  allowances 
for  next  year  are  granted  on  the  basis  of  the  amount  allowed 
in  the  year  previous,  with  such  increases  or  decreases  as  the 
departments  see  fit  to  ask  for.  In  order  to  be  on  the  safe 
side,  however,  they  generally  ask  for  a  good  deal  more  than 
they  actually  need,  with  the  inevitable  result  that  supplies 
are  overpurchased,  causing  a  large  quantity  of  them  to  be 
stored  up  in  locked  rooms.  This  kind  of  extravagance  and 
waste  can  be  put  a  stop  to  only  through  the  establishment  of 
a  proper  storehouse  system. 

Further,  the  segregated  budget  provides  itemized  appro- 
priations for  different  divisions,  bureaus  and  offices  within 
one  department,  necessitating  the  separate  purchase  of  the 
supplies  they  require.  The  result  is  that  one  bureau  within 
a  department  may  keep  a  large  stock  on  hand  for  which  it 
has  no  immediate  use,  while  another,  within  the  same  de- 
partment, fmay  be  obliged  to  buy  a  supply  of  the  same 
article  on  open  market  orders,  in  order  to  meet  an  emer- 
gency. There  are  over  2,000  different  delivery  points  at 
which  articles  of  supplies  are  received  and  accepted  by  the 
city.    The  evil  effects  of  such  a  decentralized  system  of  de- 


235]      SEGREGATION  OF  BUDGETARY  ESTIMATES  51 

Hvering  and  receiving  supplies  upon  the  securing  of  com- 
petitive prices  and  the  task  of  the  inspectors  in  ascertaining 
whether  or  not  the  supplies  are  in  strict  compliance  with  the 
specifications  or  whether  or  not  they  have  been  properly  de- 
livered, cannot  be  overstated/ 

(3)  How  Purchases  of  Supplies  are  Made  by  the  City. 
The  city  charter  vests  the  heads  of  120  different  depart- 
ments, bureaus,  boards,  commissions,  and  ofifices  under  the 
city  government  with  the  power  to  purchase  supplies.  The 
methods  of  purchase  vary  from  department  to  department; 
there  is  no  uniform  system  of  accounting  for  purchases. 
No  department  knows  what  its  sister  departments  are  buy- 
ing; therefore  the  benefits  obtained  and  the  results  achieved 
by  one  department  are  of  no  practical  value  to  another.  It 
has  been  long  recognized  as  an  economic  law  that  the  larger 
the  quantity  purchased,  the  cheaper  is  the  price,  but  the  city 
has  heretofore  failed  to  avail  herself  of  the  operation  of  this 
law.  Instead  of  buying  through  one  purchasing  bureau  ma- 
terials and  supplies  in  large  quantities  at  wholesale  prices  or 
after  competitive  bids,  the  120  different  departments,  bu- 
reaus, offices,  and  institutions  are  each  buying  at  retail 
prices. 

The  charter  provides  for  the  purchase  of  supplies  in  small 
quantities  to  the  extent  of  $1,000.  upon  what  are  known  as 
"  open  market  orders  ",  without  competition.  This  provi- 
sion has  been  greatly  abused  by  the  departments.  This  char- 
ter provision  was  intended  to  cover  only  small  emergency 
purchases.  A  careful  study  of  the  unit  prices  paid  for 
supplies  bought  both  upon  contract  and  upon  market 
order,  without  competition,  shows  that  the  city  pays  about 
25   per  cent   more   for   supplies  bought  under  the   latter 

1  Comptroller's  Report  Submitting  Plan  of  Proposed  System  for  the 
Central  Purchase  and  Distribution  of  Supplies,  March  15, 1913,  pp.  13-14- 


52  FINANCES  OF  THE  CITY  OF  NEW  YORK  [236 

method.  In  the  case  of  large  commercial  corporations, 
emergenc}^  purchases  generally  cover  al30ut  3  per  cent  of 
the  entire  amount  of  purchases,  whereas  with  the  City  of 
New  York  they  rise  above  30  per  cent  of  the  whole  expendi- 
ture for  supplies.  It  is  obvious  that  the  city  departments! 
are  continually  splitting  up  the  large  orders  into  small  ones 
in  order  that  the  amount  they  pay  for  each  order  may  not 
exceed  $1,000. 

With  the  vast  number  of  small  open  market  order  pur- 
chases, there  come  in  vast  numbers  of  vouchers,  drawn  bv 
the  departments  upon  the  finance  department  for  payment. 
This  means  an  unnecessary  amount  of  work  in  preparing 
and  recording  the  vouchers  in  the  purchasing  departments 
themselves,  and  in  recording  and  paying  them  in  the  finance 
department.  It  entails  an  unnecessary  delay  in  paying  the 
bills,  thus  preventing  many  large  dealers  from  bidding  for 
the  purchases  and  at  the  same  time  increasing  the  cost  of 
supplies.^ 

(d)  A  General  City  Storehouse.  All  these  disadvantages 
could  be  done  away  with  through  a  general  city  storehouse, 
operated  "  as  a  clearing  house  for  the  receipt  and  distribu- 
tion of  all  supplies  required  by  every  city  department,  ex- 
cept perishable  supplies,  and  coal,  wood,  and  forage."  On 
the  other  hand,  the  chief  advantages  arising  from  such  a 
central  system  will  be  as  follows : 

(i)  The  consolidation  of  all  the  delivery  points  at  which 
supplies  are  now^  received  and  accepted,  thereby  encourag- 
ing the  large  dealers  to  bid  on  supply  contracts.  This  will 
inevitably  bring  about  a  reduction  in  unit  costs.  Further, 
a  centralized  system  makes  it  easy  unifonnly  to  enforce  the 
purchase  specifications  and  adequately  to  inspect  all  deliv- 
eries. 

1  Comptroller's  Report  Submitting  Plan  of  Proposed  System  for  the 
Central  Purchase  and  Distribution  of  Supplies,  March  75, /p/J,  pp.  9-10. 


237]       SEGREGATION  OF  BUDGETARY  ESTIMATES  53 

(2)  A  great  reduction  in  the  amount  of  money  tied  up  in 
the  large  surpluses  of  supplies  stored  away  in  locked  rooms 
and  closets,  for  which  there  is  no  immediate  use. 

(3)  "  The  absolute  control  over  the  distribution  of  all 
kinds  of  supplies  to  every  city  department  by  the  creation 
of  comprehensive  unifonn  departmental  and  general  store- 
keepers' records,  accounts  and  perpetual  stock  inventories." 

(4)  The  establishment  of  records,  which  will  enable  the 
appropriating  body  to  authorize  appropriations  for  supplies 
on  the  basis  of  complete  and  accurate  information  as  to  the 
actual  user  of  supplies  and  the  stock  on  hand  from  year  to 
year  in  every  city  storehouse.^ 

(e)  Standardization  of  Materials  and  Supplies.  Up  to 
1909  no  effort  was  made  by  the  City  of  New  York  to  apply 
the  principles  of  standardization  to  the  purchase  of  ma- 
terials and  supplies,  in  spite  of  the  fact  that  no  two  of  the 
120  different  purchasing  departments  used  the  same  method 
in  making  purchases.  There  was  also  an  amazing  lack  of 
uniformity  in  the  character  of  specifications  and  records 
maintained  by  the  different  departments. 

For  instance,  in  the  past  each  purchasing  department  pre- 
pared its  own  specifications.  The  result  was  every  conceiv- 
able kind  of  more  or  less  loosely  drawn  specification.  In 
most  of  these  no  quality  standard  could  be  found.  One  of 
the  largest  coal-using  departments  in  the  city  purchased  its 
supplies  upon  what  is  known  as  the  "  coal  area  basis,"  that 
is,  the  specifications  required  that  the  coal  delivered  should 
come  from  certain  well-known  mines  in  certain  coal  areas, 
but  if  the  contractor  delivered  any  kind  of  coal,  the  burden 
of  proof  rested  upon  the  city  to  prove  that  the  coal  delivered 
was  not  equal  in  quality  to  that  demanded  in  the  specifica- 
tions. 

1  Comptroller's  Report  Submitting  Plan  of  Proposed  System  for  the 
Centra!  Purchase  and  Distribution  of  Supplies,  March  is,i9U^P-  16. 


54  FINANCES  OF  THE  CITY  OF  NEW  YORK  [238 

This  lack  of  uniformity  has  cost  the  city  millions  of  dol- 
lars each  year,  which  must  be  regarded  as  a  sheer  waste. 
This  loss  could  be  successfully  prevented  or  checked  by 
learning  what  one  of  the  largest  railway  corporations  on  the 
continent  is  doing.  "  Through  the  medium  of  a  central 
purchasing  department,  sixty  million  dollars'  worth  of  sup- 
plies and  materials  is  purchased  annually  for  every  recjuire- 
ment  of  over  five  thousand  miles  of  railway  with  its  sleep- 
ing and  dining-car  services,  a  trans-Atlantic  and  trans- 
Pacific  steamship  line,  and  a  string  of  high-class  hotels  ex- 
tending across  the  entire  continent."  Every  dollar's  worth 
of  this  tremendous  amount  of  supplies  and  materials  of  all 
kinds  is  purchased  upon  standard  specifications. 

As  we  have  already  seen,  the  segregated  budget  of  New 
York  City  has  reached  such  an  advanced  stage  that  different 
appropriations  are  made  for  different  classes  of  supplies, 
materials  or  equipment.  This  certainly  protects  the  city's 
funds  in  a  large  measure  from  wrong  use.  But  because  the 
supplies  or  materials  are  bought  by  120  departments  on 
widely  varying  or  loosely  drawn  specifications,  the  city's 
financial  interests  are  still  sacrificed. 

The  necessity  of  modifying  or  rather  improving  the 
specifications  therefore  made  itself  felt.  To  this  end,  a 
committee  on  standardization,  consisting  of  the  mayor,  the 
comptroller  and  the  president  of  the  board  of  aldermen, 
was  elected  in  19 10  by  the  board  of  estimate  and  appor- 
tionment. This  committee  in  turn  appointed  a  commission 
on  standardization  for  the  purpose  of  standardizing  the  ma- 
terials and  supplies.  It  is  the  duty  of  this  commission  tO' 
determine  as  far  as  possible  the  character  and  probable 
amount  of  each  class  of  materials  and  supplies  annually  pur- 
chased by  the  city  and  to  formulate  specifications  under 
which  such  materials  and  supplies  might  be  most  advan- 
tageously purchased.    But  while  the  board  of  directors  of  a 


239]       SEGREGATION  OF  BUDGETARY  ESTIMATES  cc 

railway  company  can,  at  will,  revolutionize  every  adminis- 
trative method  and  introduce  in  its  place  an  entirely  ne'w 
and  different  system  in  order  to  secure  the  best  results, 
the  board  of  estimate  and  apportionment  v/ould  meet  with 
a  great  deal  of  difficulty  in  carrying  out  this  principle,  be-' 
cause  under  the  provisions  of  the  charter,  and  the  laws  gov- 
erning the  administrative  functions  of  the  city,  the  power 
to  purchase  materials  and  supplies  is  vested  in  the  heads  of 
the  various  departments.^ 

To-day  the  difficulties  are  mostly  overcome  and  by  sub- 
stituting methods  of  precision  for  pull  and  guess-work,  light 
for  darkness,  the  city  will  save  millions  of  dollars  a  year 
whose  waste  in  the  dark  era  never  came  to  light.  By  stand- 
ardizing coal  and  boiler  grates.  Borough  President  McAn- 
eny  has  cut  his  coal  bill  from  $90,000  to  $45,000.-  Stand- 
ardization means  not  only  economy  in  price,  but  also  econ- 
omy in  service  ability,  for  the  city  is  assured  the  delivery 
of  suitable  goods  of  uniform  quality.  At  the  beginning  of 
19 14  supply  standardization  was  about  75  per  cent  com- 
pleted.' 

The  method  of  standardizing  specifications  consists  in: 

First,  tabulating  and  analyzing  the  quantities  and  cost  of 
commodities  l30ught  by  all  of  the  city  departments  and  the 
conditions  under  which  they  are  purchased. 

Second,  submitting  to  technical  and  trade  experts  the  ten- 
tative specifications  prepared  by  a  sub-committee  furnished 
with  this  detailed  information. 

*  Proceedings  of  the  Seventh  Annual  Convention  of  the  National 
Association  of  Comptrollers  and  Accounting  Officers,  1912,  contains 
an  article  on  EfHcieiicy  in  City  FurcJiasing,  by  Richmond  Smith, 
PP-  133-143- 

'  The  Cost  of  Government  in  New  York  City,  by  Henry  Bruere, 
published  by  the  Record  &  Guide  Co.,  p.  4. 

»  Ibid. 


56  FIXANCES  OF  THE  CITY  OF  XEJV  YORK  [240 

Third,  submitting  to  a  conference  between  the  commis- 
sion and  all  the  departmental  purchasing  agents  concerned 
the  revised  tentative  specifications. 

Fourth,  the  forwarding  to  each  member  of  the  board  of 
estimate  and  apportionment  the  perfected  specifications, 
in  the  form  of  a  report  recommending  "  their  adoption  for 
general  use  by  all  city  departments,  well  in  advance  of  the 
time  when  the  board  is  requested  to  act  upon  the  Report 
for  adoption."  ^ 

(f)  A  Central  Purchasing  Bureau.  In  order  to  make  the 
standardization  a  success,  it  is  necessary  to  establish  a  cen- 
tral purchasing  bureau  for  the  entire  city  government. 
This  proposition  must  not  be  looked  upon  as  a  new  and 
untried  scheme  for  New  York  City.  For  instance,  the  com- 
missioner of  the  water  department  reported  on  the  substan- 
tial savings  as  a  result  of  establishing  a  bureau  of  supplies 
"  which  purchases,  inspects,  stores  and  issues  materials  used 
by  the  department  and  lets  all  contracts."  It  is  the  habit  of. 
the  water  department  continually  to  keep  in  store  a  quantity 
of  supplies  worth  hundreds  of  thousands  of  dollars.  About 
seven  years  ago  when  an  inventory  was  taken  by  the  Bureau 
of  Municipal  Research  of  the  large  water  department  pipe 
yard  in  24th  Street,  it  was  found  that  the  entire  storehouse 
was  strewn  all  over  with  articles  of  materials  and  supplies 
and  although  records  were  kept,  they  were  of  no  value  as  a 
means  of  showing  the  kinds  and  quantities  on  hand.  Un- 
derneath other  supplies  there  lay  hidden  large  quantities  of 
expensive  supplies,  which  were  purchased  years  ago  but 
were  no  longer  useful  on  account  of  the  changes  in  equip- 
ment. None  of  the  expensive  goods  which  were  stored  in 
this  yard  was  given  proper  protection.  To-day,  by  having 
properly  organized  the  storehouses,  with  classified  lines  and 

^  First  Animal  Report,  Commission  on  Standardization,  June  30,  191 1, 
pp.  7-8. 


241  ]       SEGREGATION  OF  BUDGETARY  ESTIMATES  57 

records  showing  what  comes  to  stores  and  what  goes  out  of 
them  the  water  department  is  able  to  exercise  a  control 
over  all  its  supplies  and  materials. 

Another  striking  example  of  a  central  purchasing  bureau 
is  offered  by  the  office  of  Borough  President  McAneny.  It 
was  found  that  under  the  administration  of  his  predecessor, 
John  F.  Ahearn,  gross  extravagance  and  favoritism  were 
extensively  practiced  in  the  purchase  of  supplies.  A  *'  yard 
of  lemons  "  taken  from  Ahearn's  purchases  showed  that  the 
prices  paid  by  his  department  for  large  quantities  ranged 
from  50  to  57  per  cent  more  than  the  prices  paid  for  the 
same  articles  in  units  of  one  by  the  Bureau  of  Municipal 
Research.^  Undoubtedly  Borough  President  Ahearn's 
friends  had  been  supplied  with  lemons  at  the  city's  ex- 
pense. When  Mr.  McAneny  came  into  office  as  Borough 
President,  one  of  his  first  tasks  was  to  revolutionize  the 
purchasing  methods.  A  central  purchasing  office  was  or- 
ganized to  take  the  place  of  the  five  bureaus  under  his  juris- 
diction, which  purchased  supplies  independently  of  each 
other.  He  required  two  things  tO'  be  done,  viz.,  ( i )  the  pur- 
chase of  goods  of  adequate  quality,  and  (2)  the  invitation 
of  fair  bids  upon  them. 

Being  fully  convinced  of  the  feasibility  of  the  plan  for  a 
central  purchasing  bureau,  not  for  one  department  but  for 
the  entire  city  government,  Comptroller  Prendergast  has 
lately  issued  a  report  recommending  the  adoption  of  the 
plan.  In  this  report  he  pointed  out  the  great  waste  of 
money  attributed  to  the  diversity  of  purchasing  methods  as 
practiced  by  the  120  departments  and  to  the  wide  range  of 
prices  for  supplies  bought  by  them.  He  also  showed  that 
the  practice  of  buying  supplies  on  open  market  orders,  as 
contrasted   with   competitive   contracts,   penalizes  the  city 

'  The   Cost   of  Government   in   Neiv   York   City,   by   Henry   Bruere, 
p.  7- 


^8  FINANCES  OF  THE  CITY  OF  NEW  YORK  [242 

about  25  per  cent.  His  figures  indicated  a  waste  of  $700,- 
000  in  the  purchase  of  $3,500,000  worth  of  supplies  on  open 
market  orders  in  191 1.  A  joint  legislative  committee  in- 
vestigating the  city's  finances  as  long  ago  as  1909  expressecB 
itself  as  in  favor  of  establishing  a  central  purchasing  agency. 
The  Ivins'  charter  commission  before  that  time  and  the 
Hammond's  charter  commission  afterwards  made  similar 
recommendations.  But  their  recommendations  were  not  en- 
acted into  law,  on  account  of  legislative  inertia  plus  the 
political  influence  of  interested  contractors. 

The  comptroller's  charge  that  the  manner  in  which  sup- 
plies are  purchased  for  the  various  city  departments  is  a 
source  of  extravagance  and  abuse  for  the  reason  that  it 
leads  to  favoritism  and  payment  of  excessive  prices,  can  be 
amply  demonstrated  by  facts.  Section  419  of  the  Greater 
New  York  Charter  provides  that  all  work  and  supplies 
worth  $1,000  or  over  shall  be  purchased  by  contract  to  be 
awarded  to  the  lowest  bidder,  unless  the  board  of  estimate 
and  apportionment,  by  a  three-fourths  vote  of  all  its  mem- 
bers, shall  choose  to  award  it  to  a  bidder  other  than  the  low- 
est. There  is  no  indication  whatever  that  this  provision 
has  brought  about  an  effective  economy  in  the  expenditure 
for  supplies.  When  the  city's  interests  are  entrusted  to  an 
honest  commissioner,  they  will  be  safe,  but  when  they  are 
placed  in  the  hands  of  a  dishonest  one  he  can  find  many 
ways  to  bring  the  efforts  of  the  law-makers  to  naught.  x\s 
stated  above,  instances  have  been  found  where  the  charter" 
provisions  pennitting  a  purchase  of  supplies  in  quantities 
involving  an  expenditure  of  less  than  $1,000  without  con- 
tract, upon  what  are  known  as  open  market  orders,  has  been 
frequently  violated  or  secretly  evaded.  This  evasion  is 
found  "  in  practically  every  department.  In  one  depart- 
ment alone,  there  were  purchased  over  $60,000  worth  of 


243]       SEGREGATIOX  OF  BUDGETARY  ESTIMATES  59 

standard  supplies  on  orders  of  this  kind  from  one  firm  in 
three  years."  ^ 

In  order  to  remedy  these  abuses  it  is  proposed  to  estabHsh 
a  general  purchasing  bureau  under  the  jurisdiction  of  a  pur- 
chasing agent,  whose  duty  it  is  to  purchase  all  supplies  re- 
quisitioned for  by  the  120  different  departments,  bureaus, 
etc.  He  shall  be  responsible  not  only  for  the  prices  paid 
by  him,  but  also  for  the  preparation  of  all  vouchers  trans- 
mitted to  the  comptroller's  office  for  payment.  Thus,  in- 
stead of  inviting  bids  for  every  conceivable  kind  of  supply 
in  a  single  contract,  bids  will  be  invited  for  the  gross  c|uan- 
tity  required  in  a  single  trade  line  under  a  single  contract. 
In  the  place  of  a  hundred  or  more  different  contracts,  there 
will  come  into  use  only  one  contract ;  in  the  place  of  the 
widely  varying  unit  prices,  there  will  be  substituted  the  low- 
est possible  unit  price.  This  means  a  great  reduction  in  the 
number  of  vouchers,  offering  the  city  the  opportunity  of  se- 
curing special  cash  discounts  in  the  payment  of  its  bills. 
It  also  means  a  great  increase  in  the  competition  for  the 
city's  supply  contracts,  and  a  corresponding  reduction  in 
prices. 

Further,  the  vesting  of  the  power  to  purchase  all  supplies 
for  the  city,  with  few  exceptions,  in  one  purchasing  agent 
affords  every  facility  to  exercise  an  administrative  control 
over  all  orders  issued  and  payment  vouchers  passed  for  sup- 
plies bought.  One  feature  of  the  proposed  plan  is  for  the 
purchasing  agent  to  prepare  a  daily  control  statement, 
"  showing  the  city's  complete  approximate  contingent  lia- 
bility for  supplies  ordered,  as  well  as  its  complete  actual 
liability  for  supplies  vouchered  for  payment."  '     This  will 

*  Report  of  the  Charter  Revision  Commission  of  190^,  p.  44. 

'  Comptroller's  Report  Submitting  a  Plan   of  Proposed  System  for 
the  Central  Purchase  and  Distribution  of  Supplies,  pp.  10-12. 


6o  FINANCES  OF  THE  CITY  OF  NEIV  YORK  [244 

be  a  long  step  toward  continuous  control  over  one  of  the 
most  important  items  in  the  city's  budget. 

E.    THE  ALLEGED  DISADVANTAGE  OF  SEGREGATION 

It  has  been  advanced  as  an  argument  against  segregation 
that  a  segregated  budget  presupposes  a  detailed  classification 
of  accounts,  which  increases  the  outlay  for  clerical  service, 
because  the  items  which  under  the  loose  system  were  posted 
to  one  account  must  now  be  posted  to  many  different  ac- 
counts. Th''s  argument  is,  however,  fallacious.  To  segre- 
gate accounts  entails  no  larger  expenditure  for  clerical  ser- 
vice, because  a  payment  of  $25,000  for  the  hire  of  a  vehicle) 
could  be  charged  and  posted  to  a  page  headed  "  Horse 
Hire  "  with  the  same  ease  as  it  was  posted  to  a  page  headed 
"  Miscellaneous."  On  the  other  hand,  high  segregation  re- 
duces to  a  considerable  extent  the  difficulty  of  recasting  and 
recapitulating  the  items  in  the  ledger  in  order  to  find  out 
what  has  been  posted.  Moreover,  since  items  of  identical 
nature  would  be  posted  to  the  same  accounts,  the  different  ac- 
counts would  therefore  stand  out  by  themselves  and  a  com- 
parative study  of  them,  together  with  the  results  achieved, 
would  show  most  vividly  where  waste  and  extravagance 
have  crept  in  and  w^here  economies  have  been  effected  and 
jcfiiiciency  has  been  increased.^ 

F.    ADVANTAGES  OF  SEGREGATION 

The  first  advantage  of  segregation  is  that  a  segregated 
budget  will  enable  the  comptroller  to  present  such  a  clear 
and  comprehensive  summary  of  departmental  expenditures 
as  to  focus  the  attention  of  the  general  public  upon  the  most' 
salient  features  of  the  annual  budget.  For  example,  what 
proportion  of  the  total  budget  was  currently  expended  for 

^  Cf.  a  pamphlet  published  by  the  Bureau  of  Municipal  Research,  1907, 
Making  a  Municipal  Budget,  pp.  29-30. 


245]       SEGREGATION  OF  BUDGETARY  ESTIMATES  6l 

operation,  what  proportion  for  the  payment  of  interest  and 
sinking  funds,  etc.  Under  the  cost  of  operation  he  may 
also  show  what  portion  of  it  was  for  general  administration, 
what  portion  for  the  care  of  dependents  and  defective  per- 
sons, which  is  a  function  performed  sometimes  by  more 
than  one  department  or  institution,  as  in  New  York  City, 
what  portion  for  health  and  recreation,  what  portion  for 
protection  of  life  and  property,  etc.  Moreover,  if  the  next 
year's  estimated  expenditures  are  brought  into  comparison 
with  the  estimated  revenues,  the  deficiency  of  revenue,  if 
any,  can  be  most  prominently  shown.  This  will  emphasize 
the  fact  that  the  city  is  financially  embarrassed,  and  that 
unless  new  sources  of  revenue  are  found,  it  will  be  ham- 
pered in  carrying  out  its  multifarious  purposes. 

The  second  advantage  is  that  in  a  segregated  budget  pro- 
visions for  labor,  materials,  etc.,  are  separated  one  from  the 
other.  Under  the  old  "  lump-sum  "  system  all  of  them 
might  be  covered  by  one  account.  The  skillful  employees, 
like  the  municipal  engineers,  did  not  know  that  actual  labor 
and  material  required  for  the  performance  of  their  work 
had  been  provided  for  in  the  budget.  The  indefinite  method 
of  hiding  everything  in  one  lump  sum  gave  them  no  assur- 
ance that  the  money  provided  for  labor  and  materials  would 
not  be  diverted  to  other  purposes.  This  misuse  of  funds, 
can  be  prevented  by  means  of  segregation,  which  affords  a 
security  that  the  money  provided  for  their  work  will  not 
be  misused,  and  encourages  the  engineers  to  take  definite 
steps  in  carrying  out  their  projects.  Without  a  segregated 
budget  they  will  hesitate  to  perfomi  the  work. 

Further,  in  the  old  days,  the  chief  clerk  or  some  repre- 
sentative of  the  departmental  head  would  sit  down  behind' 
closed  doors  and  make  up  an  estimate  based  on  guess-work. 
Now,  the  engineers  themselves  are  required  to  furnish  de- 
tailed information  in  regard  to  particular  needs.   This  makes 


62  FINAXCES  OF  THE  CITY  OF  XEJV  YORK  [246 

it  necessary  for  them  to  study  their  needs  and  to  plan  care- 
fully for  the  year's  work.  A  more  accurate  estimate  as  to- 
the  probable  cost  is  therefore  obtained.  In  addition  to  this 
advantage  there  is  a  corresponding  benefit  to  the  engineers, 
because  if  they  are  required  to  study  their  needs  they  can 
readily  furnish  the  appropriating  body  with  exact  informa* 
tion,  thereby  supporting  in  a  large  measure  any  request  that 
they  may  make. 

The  third  advantage  is  that  a  change  of  the  commissioner 
or  departmental  head  will  not  cause  the  plan  of  the  work  tq 
be  altered.  For  instance,  under  the  old  system  where  scores 
of  indefinite  things  were  grouped  together  a  new  commis- 
sioner might  alter  the  plan  of  a  certain  work,  because  it  did 
not  meet  his  approval.  Money  which  had  already  been 
spent  on  it  was  thus  wasted.  Under  the  present  system  after 
an  authorization  is  made  for  specific  improvements  and 
plans  drawn  therefor,  a  new  commissioner  cannot  divert  the 
money  to  purposes  other  than  those  intended.  He  must 
either  carry  out  the  project  indicated  in  the  authorization  or 
receive  public  censure  for  an  extravagant  and  wasteful  ad- 
ministration. 

The  fourth  advantage  of  a  segregated  budget  is  the  pre- 
vention of  padding  the  payrolls.  It  is  a  well-known  fact 
that  when  lump-sum  appropriations  were  made  as  much  of 
them  as  possible  was  frequently  held  back  for  political  pur- 
poses until  the  fall  of  the  year,  especially  in  a  year  of 
closely  contested  elections.  The  important  work  of  the  de- 
partment might  be  postponed  until  the  fall,  when  primary 
elections  were  held.  Scores  of  laborers  were  then  placed 
on  the  payrolls  and  received  pay  from  the  lump  appropria- 
tions, although  in  many  cases  no  work  was  done.  Under* 
the  present  scheme,  this  practice  has  been  greatly  lessened. 

The  fifth  advantage  is  that  it  is  more  difficult  now  to 
award  contracts  to  favorite  contractors  for  enormous  quan- 


247]       SEGREGATION  OF  BUDGETARY  ESTIMATES  63 

titles  of  materials  and  supplies,  more  than  possibly  could  be 
used.  Such  practices,  which  were  almost  the  order  of  the 
day  under  the  old  system,  are  now  greatly  reduced,  through 
the  adoption  of  a  segregated  budget. 

In  the  latter  part  of  1903  about  3.300  brass  curb  cocks 
were  received  at  the  Twenty-fourth  Street  pipe  yard  of  the 
Department  of  Water  Supply.  In  1908,  five  years  later, 
3,200  of  these  same  cocks  were  lying  undisturbed  in  their 
original  resting  place.^  Such  practices  are  rendered  more 
difficult  through  a  segregated  budget,  because  the  estimates 
of  needs  for  certain  pieces  of  work  are  made  more  accurate 
through  the  operation  of  unit  cost  accounting  and  the  care- 
ful investigation  and  study  of  the  examiners. 

1  Cf.  Proceedings  of  Mtinicipal  Engineers  for  New  York  City.  191 2, 
p.  132. 


CHAPTER  II 

Preparation  and  Examination  of  Budgetary 

Estimates 

a.  preparation  of  budgetary  estimates  ^ 

I.  Method  Follozved  by  Departments  in  Filling  Out  Bud- 
getary Salary  Forms. — In  New  York  City  the  various  de- 
partments are  required  by  the  charter  to  submit  estimates  of 
their  needs  for  the  succeeding  year  not  later  than  Septem-i 
ber  loth.  For  this  purpose,  as  pointed  out  in  Chapter  I., 
uniform  schedules  on  specially  ruled  and  printed  forms  are 
furnished  by  the  comptroller.  They  are  usually  sent  to  the 
departments  shortly  after  June  ist,  which  allows  them  over 
three  months  in  which  to  prepare  their  estimates  and  enter 
them  upon  the  forms  in  accordance  with  regulations  de- 
signed to  secure  a  clear  presentation  of  the  nature  of  in- 
creases or  decreases  of  the  departmental  estimates  and  to 
make  possible  rigid  control  over  the  departmental  expendi- 
tures. One  of  the  personal  service  forms  will  serve  as  an 
example  of  the  procedure  followed.  In  this  fonn  one  of 
the  main  columns  with  the  heading.  "  Titles  of  Positions  ", 
is  divided  into  two  branch  columns,  the  first  for  the  titles  of 
unchanged  positions,  and  the  second  for  those  of  all  new 
positions  or  all  positions  in  which  changes  are  requested. 

'  This  section  is  based  largely  upon  the  instructions  and  the  uniform 
schedules  sent  out  from  the  finance  department  to  the  various  out- 
side departments,  bureaus,  offices  and  institutions,  as  well  as  upon  my 
personal  talks  with  the  examiners. 

64  [248 


249]  PREPARATION  AND  EXAMINATION  65 

Take,  for  instance,  the  following  item  in  a  certain  schedule 
in  the  budget  of  1914: 

Clerk,  6  at  $goo  $5,400 

Assume  that  the  head  of  the  department  under  whom  these 
six  clerks  are  working  wishes  to  promote  one  of  them  to  a 
higher  position,  with  a  salary  of  $1,050,  and  to  engage  a 
new  clerk  to  take  the  place  of  the  one  promoted.  Instead 
of  six  clerks  as  before,  there  are  now  seven  clerks,  of  whom 
six  are  old  and  one  is  new;  and  of  the  six  old,  one  is  pro- 
moted to  a  higher  position.  Under  the  old,  loose  method, 
the  departmental  head  would  in  such  a  case  have  sent  in  a 
request  for  six  clerks  at  $900  and  an  additional  clerk  at 
$1,050.  There  would  be  nothing  to  show  that  one  of  the 
six  clerks  at  $900  is  a  new  employee  to  take  the  place  of 
the  one  promoted,  and  that  the  clerk  at  $1,050  is  not  an 
additional  new  clerk  but  an  old  clerk  deserving  promotion 
by  reason  of  his  efficiency,  ability,  or  diligence.  This  lack 
of  information  was  characteristic  of  the  old  hodge-podge 
method  of  making  appropriations.  Under  the  new  method 
full  information  is  given  as  to  the  exact  nature  of  the  pro- 
posed changes.  In  the  case  under  discussion,  the  head 
sends  in  a  request,  not  for  six  clerks  at  $900,  but  for  five 
clerks  at  $900,  and  because  their  titles  are  titles  of  un- 
changed positions,  they  are  carried  in  the  first  column.  He 
then  asks  for  one  clerk  at  $900,  whose  title  of  position  is 
put  in  the  second  column  to  show  that  he  is  a  new  employee. 
Finally  he  requests  a  clerk  at  $1,050  and  carries  his  title 
into  the  second  column  to  indicate  that  he  is  a  $900  clerk 
promoted  to  $1,050. 

In  order  to  convey  a  clearer  understanding  of  the  pro- 
cedure followed  in  filling  out  the  form  with  salary  estimates, 
so  as  to  furnish  exact  information  as  to  the  departmental 
estimates,  I  shall  go  into  the  details  of  this  part  of  budget- 


66  FIXAXCES  OF  THE  CITY  OF  XEIV  YORK  [250 

making  and  point  out  the  evil  practices  which  the  new  pro- 
cedure is  intended  to  remedy.  To  better  serve  the  purpose, 
I  take  up  the  procedure  to  be  followed  in  filling  out  a  per- 
sonal service  form  based  on  an  imaginary  schedule  in  the 
department  of  -water  supply,  gas  and  electricity.  This 
schedule  is  assumed  to  appear  in  the  19 14  budget  as  follows : 

Water  Supply,  Gas  and  Electricity 

Personal  Service 

Salaries,  Regular  Employees 

Illumination,  Power  and  Heat  Control 

No.  482,     Inspection. 

Assistant  Engineer  $2,250 

Chief  Inspector,  2  at  $2,250 4,500 

Inspector,  6  at  $2,250   13,500 

Inspector,  25  at  $1,500  37,500 

Inspector,  43  at  $1,200 51,600 

Clerk   1,950 

Qerk   1,800 

Clerk.  3  at  $i,350 4,050 

Clerk,  3  at  $1,200 3,600 

Clerk,  4  at  $1,050 4,200 

Clerk,  9  at  $900 8,100 

Clerk,  3  at  $750 2,250 

Stenographer  &  Typewriter,  5  at  $1,050 5,250 

Stenographer  &  Typewriter,  4  at  $900 3,600 

Balance  unassigned 300 

$144,450 

Let  US  assume  that  the  head  of  the  department  wishes  to 
make  changes  in  this  schedule.  He  requests  an  increase  of 
$250  in  the  salary  of  the  assistant  engineer  at  $2,250.  Con- 
sequently he  puts  his  title  of  position  in  the  second  column 
under  the  heading  "  Titles  of  Position."  Besides  the  main 
column  for  titles  of  positions,  there  are  many  other  columns 
in  the  form,  two  of  which  are  the  rate-columns,  one 
under  the  heading  of  "  Requested  for  19 15,"  and  the  other 
for  the  "  June  condition  in  1914."'     In  the  "  Requested  for 


251]  PREPARATION  A.\D  EXAMINATION  67 

191 5  "  column,  he  places  the  amount  of  $2,500  and  in  the 
"  June  condition  "  column  he  shows  the  fact  that  the  pres- 
ent rate  is  $2,250.  In  another  column  with  the  caption  of 
**  Requested  Increase  in  Salaries,"  he  places  $250,  which  is 
the  increase  in  salary  he  requests.  He  follows  the  same  line 
across  and  when  he  reaches  a  column  headed  "  Individuals 
for  whom  salary  increases  are  requested,"  he  puts  the  name 
of  the  assistant  engineer,  which  we  shall  assume  to  be  John 
Sylvester.  He  also  notes  the  fact  that  the  date  of  the  last 
increase  for  Mr.  Sylvester  was  May  i,  1906,  and  that  the 
amount  of  the  last  increase  was  $150.  In  this  way  the  ap- 
propriating body  is  enabled  to  know  that  there  has  been  a 
long  interval  since  Mr.  Sylvester  received  an  increase  in 
salary,  and  that  the  last  increase  was  only  $150.  The  old 
practice  of  increasing  the  salaries  of  favorite  employees  at 
will  at  short  intervals  of  time  is  thus  rendered  more  difficult. 

Passing  over  the  two  chief  inspectors  at  $2,250  and  six 
inspectors  at  $2,250,  we  come  to  the  item  "25  inspectors  at 
$1,500."  In  this  item,  the  departmental  head  desires  to 
make  changes  in  six  of  the  incumbents.  As  this  leaves 
nineteen  incumbents  unaffected,  representing  the  unchanged 
portion  of  this  item,  their  titles  of  position  are  placed  in 
the  first  column  under  "  Titles  of  Position." 

The  method  pursued  in  making  the  requests  for  the  re- 
maining six  incumbents  at  $1,500  illustrates  several  im- 
portant principles  of  budget-making.  In  the  first  place,  a 
separate  line  must  be  used  for  every  incumbent,  if  any 
change  is  to  be  made  in  his  position.  If  any  position  is  left 
vacant,  a  separate  line  must  be  used  for  each  vacancy.  It  is 
necessary  to  use  a  separate  line,  because  each  case  must  be 
considered  independently,  no  matter  whether  or  not  the  rate 
in  each  case  is  the  same.  Ordinarily,  the  board  of  estimate 
and  apportionment,  in  dealing  with  the  estimates  of  per- 
sonal service  appropriations,  treats  all  the  employees  receiv- 


68  FINANCES  OF  THE  CITY  OF  NEW  YORK  [252 

ing  a  uniform  rate  of  compensation  as  one  line  item,  as  for 
instance,  "  Inspector,  25  at  $1,500,"  in  this  case.  This  is 
true  whenever  the  twenty-five  employees  remain  in  the  same 
position  and  receive  the  same  rate  of  salary.  But  when 
some  of  them  are  to  undergo  a  change  in  their  positions  or 
a  change  in  their  salaries,  a  separate  line  must  be  used  for 
each  of  them,  because  in  each  case  the  question  of  personal 
identity  arises.  Usually  in  such  cases  the  increase  in  salary 
is  requested  on  the  ground  of  the  superior  merit  of  some  in- 
dividual employee,  which  must  be  certified  to  by  a  state- 
ment of  facts  concerning  him  alone. 

In  the  case  of  the  six  inspectors  at  $1,500  who  are  not 
to  be  left  at  that  rate,  twO'  are  to  be  dropped.  Their  titles 
of  position  must  therefore  be  in  the  second  column  under 
the  heading  "  Titles  of  Position."  If  these  two  inspectors 
are  both  engaged  in  active  service,  they  may  be  put  down  in 
one  line.  But  in  this  case  we  assume  that  one  of  the  posi- 
tions is  a  vacancy  which  is  not  to  be  filled  again.  A  separate 
line  must  therefore  be  used  to  indicate  this  fact.  Another 
separate  line  is  used  to  indicate  the  dropping  of  the  other 
position  which  is  occupied  at  present.  The  fact  that  both 
positions — one  vacant  and  the  other  occupied — are  to  be 
dropped  is  shown  in  the  column  headed  "  Reductions  in 
Force." 

For  the  remaining  four  of  the  six  inspectors  the  follow- 
ing requests  are  made  by  the  commissioner.  One  inspector 
is  slated  for  an  increase  in  salary  of  $150.  His  name  is 
Joseph  Clark.  Another  inspector,  by  the  name  of  Isaac 
Rolder,  is  slated  for  an  increase  of  $300.  Still  another, 
whose  name  is  John  Brown,  has  not  been  doing  satisfactory 
work  and  the  commissioner  proposes  to  reduce  his  salary  by 
$300.  The  fact  that  the  $300  reduction  is  requested  is 
shown  in  the  column  headed  "Decrease  in  Salaries."  Brown 
is  his  name  and  the  amount  of  his  last  increase  is  shown, 
just  as  if  an  increase  was  requested. 


253]  PREPARATION  AND  EXAMINATION  69 

The  disposition  of  the  last  inspector  at  $1,500  illus- 
trates another  very  iinportant  point  in  making  up  the  bud- 
get estimates.  Like  the  first  two  of  these  inspectors,  he  is 
to  be  dropped,  so  far  as  this  particular  schedule  is  con- 
cerned; but  unlike  the  first  two,  he  is  not  to  be  dropped 
from  the  department,  but  is  to  be  transferred  to  Account 
481,  Gas  Examination.  This  fact  is  to  be  noted  oppo- 
site his  title.  The  rate  of  his  salary  is  put  down  in  the 
column  headed  "  Reductions  in  Force,"  just  as  the  rate  of 
the  first  two  inspectors,  who  are  to  be  dropped  from  the 
department  entirely,  is  put  down  in  that  column.  The  dis- 
tinction between  these  two  cases  is  noted  by  writing 
"  dropped  "  in  the  "  Remarks  "  column,  on  each  of  the  first 
two  lines;  and  "transferred"  in  the  same  column,  on  the 
line  devoted  to  the  last  inspector. 

No  change  is  requested  for  the  item  "  Inspector,  43  at 
$1,200 — $51,600  "  and  for  "  Clerk  at  $1,950."  These  titles 
of  position  must  therefore  appear  in  the  first  column  and 
since  there  is  no  change  requested,  all  columns  indicating 
change  are  to  be  left  blank. 

Passing  over  the  three  successive  items — "  Clerk  at  $1,- 
800,"  "  Clerk,  3  at  $1,350,"  and  "  Clerk,  3  at  $1,200  "—we 
come  to  the  item,  "  Clerk,  4  at  $1,050."  A  request  is  made 
for  the  increase  of  one  of  these  clerks,  who  is  slated  for  a 
raise  to  $1,200.  This  leaves  three  of  the  four  $1,050  clerks 
undisturbed.  Their  title  of  position  appears  in  the  first 
column.  The  commissioner  wants  to  employ  four  addi- 
tional clerks  at  $1,050,  making  seven  in  all.  The  titles  of 
position  for  these  four  must  appear  in  the  second  or 
"  change  "  column,  each  on  a  line  by  itself.  Two  of  these 
clerkships  are  entirely  new,  and  are  not  transferred  from 
other  accounts  in  the  same  department.  Therefore  they  are 
marked  "  new  "  in  the  "  Remarks  "  column.  The  June 
condition  columns  for  these  two  clerkships  are  left  blank,. 


jQ  FINANCES  OF  THE  CITY  OF  NEW  YORK  [254 

showing  that  they  are  not  now  employed.  The  third  of  the 
four  additional  clerks  at  $1,050  is  to  be  transferred  from 
another  account,  say  No.  478,  Administration.  The  fourth 
is  also  to  be  transferred  from  the  same  account,  but  at  an 
increase  of  salary.  His  present  salary  is  $900.  The  case 
of  the  fourth  clerk  brings  out  another  very  important  point 
to  be  borne  in  mind.  That  is,  where  employees  are  trans- 
ferred at  an  increase  of  salary,  their  present  salary  alone 
should  appear  in  the  column  showing  additions  to  force, 
and  the  proposed  increase  of  salary  should  appear  in  the 
column  devoted  to  increases  of  salary.  In  the  case  of  these 
four  additional  clerks  at  $1,050,  all  represent  new  men,  so 
far  as  this  schedule  is  concerned,  but  in  the  case  of  the  last 
additional  clerk,  his  present  salary  of  $900  is  raised  to  $1,- 
050.  showing  an  increase  of  $150.  Consequently,  he  is  put 
down  in  the  column  headed  "  Additions  to  Force  "  at  only 
$900.  It  is  very  important  to  make  this  distinction,  or  else 
it  might  lead  to  confusing  difficulties  in  determining  what 
part  of  a  requested  increase  is  for  new  men  and  what  part 
for  increases  of  salary. 

The  form  for  this  schedule  having  been  filled  out,  the 
next  thing  to  do  is  to  show  the  total  number  of  incumbents 
requested,  and  to  insert  it  in  the  space  specially  provided 
for  this  item.  There  are  other  column  summaries  to  be 
filled  in.  When  all  this  has  been  done,  the  department  must 
calculate  and  show  the  net  result  of  such  summaries,  that  is, 
the  decreases  in  the  salaries  requested  are  subtracted  from 
the  increases  in  salaries  requested  and  the  net  balance  of 
increases  must  be  shown  at  the  top  of  the  form  in  the  space 
provided  for  it.  Similarly,  the  reductions  in  force  are  de- 
ducted from  the  additions  in  force  requested  in  order  to 
show  the  net  balance.  The  same  is  done  with  the  total  of 
all  increases  or  decreases  from  all  sources. 

Another  important  point  to  learn  in  regard  to  the  method 


^mmmtnmtwttM 


255]  PREPARATION  AND  EXAMINATION  ji 

of  budget-making  in  New  York  City  is  that  the  estimates 
of  all  accounts  in  which  the  employees  are  paid  from  but 
one  kind  of  fund,  for  example,  Tax  Levy  (or  Tax  Lev^' 
and  Special  Revenue  Bonds,  which  two  funds  are  consid- 
ered as  one  kind  of  fund),  or  Corporate  Stock  or  Special 
and  Trust  funds,  or  Water  Revenue  fund  or  Bridge  Reve- 
nue fund  or  private  funds  or  fees  and  fines,  are  entered  on 
different  forms  from  those  on  which  all  accounts  in  which 
the  employees  are  paid  from  more  than  one  fund  are  en- 
tered. In  all  cases  where  the  account  is  charged  against 
more  than  one  fund,  the  distribution  of  the  charges  between 
the  funds  must  be  shown.  Wherever  a  percentage  symbol 
appears,  the  actual  percentage  should  be  shown.  If  $i(30,- 
ooo  is  requested  and  $60,000  of  this  is  chargeable  to  Tax 
Levy,  the  percentage  should  be  shown  as  60  per  cent,  and 
the  percentage  chargeable  to  other  funds  40  per  cent. 

At  the  risk  of  repetition,  it  is  well  to  emphasize  the  two 
most  important  points  in  making  out  the  personal  service 
forms.  The  first  is  that  the  departmental  chiefs  must  show 
in  separate  columns  amounts  appropriated  in  the  preceding 
year  and  explain  increases  or  decreases  by  supplementary 
statements.  It  is  no  longer  permitted  that  estimates  sub- 
mitted by  them  consist  merely  of  a  list  of  desired  appro- 
priations, without  comparative  infomiation  and  with  little 
chance  that  they  contain  sufficient  explanation  for  intelli- 
gent consideration.  The  second  is  that  in  no  case,  except 
where  no  change  is  proposed,  can  a  line  item  be  used  for 
more  than  one  incumbent. 

II.  Salary  and  Wage  Appropriations  from  "  Mixed 
Funds  " . — As  pointed  out  in  the  preceding  chapter,  the  sal- 
aries and  wages,  both  for  regular  and  temporary  em- 
ployees are  in  some  cases  paid  out  of  mixed  funds.  For 
example,  an  engineer  who  spends  40  per  cent  of  his  time 
in  drawing  designs  for  the  construction  of  a  new  bridge 


72  FINANCES  OF  THE  CITY  OF  NEW  YORK  [256 

receives  40  per  cent  of  his  salary  from  the  Corporate  Stock 
Fund,  because  the  cost  of  construction  is  a  capital  outlay. 
If  he  spends  the  balance  of  his  time  in  repairing  an  old 
bridge,  he  may  receive  60  per  cent  of  his  salary  from  Tax 
Levy,  because  the  cost  of  repairing  is  a  current  cost.  For 
that  reason  the  department  must  see  to  it  that  in  filling  out 
the  Salary  and  Wage  forms  the  distribution  between  Tax 
Levy  and  other  funds  is  clearly  indicated.  Further,  this 
distribution  must  be  on  the  basis  of  the  rate  of  the  en- 
tire first  six  months'  expenditure  and  not  on  the  basis  of 
June  payroll  alone.  In  this  way  the  traditional  method  of 
making  a  Salary  or  Wage  estimate  known  as  the  "  June 
Jump  "  is  eliminated. 

In  filling  out  the  salary  and  wage  estimate  forms,  under 
"  Mixed  Funds,"  the  departments  are  confronted  with  a 
complicated  problem.  There  may  be  two  kinds  of  increases 
in  Tax  Levy  or  other  funds  due  to  salary  increases  and  to 
change  in  the  distribution  of  cost.  For  instance,  the  sal- 
ary of  the  engineer  in  our  illustration  may  be  raised  to 
a  higher  figure,  showing  an  increase  in  Tax  Levy  or 
other  funds  due  to  the  increase  in  salary.  At  the  same 
time,  instead  of  receiving  40  per  cent  of  his  salary  from 
the  Corporate  Stock  fund,  he  may  in  the  following  year 
receive  only  30  per  cent,  thereby  transferring  the  remain- 
ing 10  per  cent  to  Tax  Levy.  There  is,  therefore,  a  re- 
quested increase  of  10  per  cent  in  Tax  Levy,  due  not  to- 
salary  increase  but  to  change  in  the  distribution  of  cost. 
Thus,  there  are  in  our  case  two  kinds  of  salary  increases 
in  Tax  Levy;  the  nature  of  one  is  so  different  from  that  of 
the  other  that  it  is  necessary  to  show  the  requested  increase 
in  Tax  Levy  or  other  funds  due  to  salary  increases,  as  dis- 
tinguished from  the  increase  due  to  change  in  the  distri- 
bution of  cost.  For  that  reason,  two  distinctions  are  shown 
in  the  form  under  "  Requested  for  191 5  ",  one  including 


257]  PREPARATION  AND  EXAMINATION  y^ 

salary  increases  requested  and  the  other  including  only  the 
19 14  salary  rate  but  distributed  on  the  basis  requested  for 
191 5.  This  distribution  must  be  made  for  each  line.  The 
difference  between  the  totals  of  the  two  distributions  should 
represent  the  increase  or  decrease  in  Tax  Levy  or  other 
funds  due  to  salary  increases.  Requested  increases  in  force 
(time)  should  be  carried  on  both  distributions  and,  of 
course,  should  be  the  same  in  both  places.  The  requested' 
change  in  distribution  where  no  change  of  rate  is  involved 
must  also  be  shown  in  both  distributions.  To  arrive  at 
the  increase  in  Tax  Levy  due  to  change  in  distribution,  the 
departments  should  consider  only  the  19 14  force  or  allow- 
ance. After  that  is  done,  they  should  then  figure  this  force 
on  the  proposed  191 5  distribution,  and  deduct  from  the  Tax 
Levy  part  arrived  at  by  this  process,  the  Tax  Levy  part 
under  the  19 14  distribution.  The  difference  in  the  change  is 
due  to  distribution.  This  change  must  always  be  figured 
out  before  the  change  due  to  salary  increases  is  taken  up. 
Salary  increases  must  always  be  distributed  on  the  191 5  re- 
quested basis.  This  rule  applies  not  only  to  the  departments 
preparing  the  estimates  but  also  to  the  examiners  analyzing 
them  after  they  are  sent  in. 

IIL  Schedule  Forms  for  Supplies. — Li  the  preceding 
chapter  I  discussed  in  detail  the  budget  classifications  and 
pointed  out  the  distinct  lines  that  have  been  drawn  between 
supplies  on  the  one  hand  and  materials  and  equipment  on 
the  other.  They  have  proved  of  great  value  in  defining  the 
class  of  each  article  purchased  by  the  city,  and  have  elimi- 
nated one  of  the  most  troublesome  features  of  audit  by  the 
finance  department,  because  the  old  practice  of  buying  an 
automobile  out  of  an  appropriation  intended  for  some  en- 
tirely different  purpose  is  now  almost  impossible.  In  every 
case  of  payment  for  articles  bought,  it  is  now  not  difficult 
to  tell  at  a  glance  whether  the  cost  is  chargeable  properly 


74  FINANCES  OF  THE  CITY  OF  NEW  YORK  [2:;8 

against  the  account  against  which  a  voucher  is  drawn.  The 
expense  accounting  system  of  the  city  has  been  changed  to 
conform  to  these  classifications.  As  the  articles  of  supplies 
have  been  split  into  eleven  classes,  it  is  necessary  to  have  a 
corresponding  splitting  of  the  supply  forms,  so  that  a 
proper  accounting  may  be  made  for  each  class.  The  im- 
portant point  to  be  borne  in  mind  in  making  out  the  esti- 
mates for  materials  and  supplies  is  that  they  should  include 
a  statement  of  supplies  on  hand  at  the  time  of  the  submis- 
sion of  estimates  and  the  expected  consumption  for  the  bal- 
ance of  the  year. 

When  the  forms  prepared  for  all  appropriations  classified 
as  food  supplies  are  filled  out,  the  attention  of  the  depart- 
ment is  called  to  the  item  "  cost  "  which  refers,  of  course, 
to  food  supplies  alone.  Stock  on  hand  which  must  be 
shown  on  the  forms  in  order  to  calculate  the  amount  of  sup- 
plies consumed,  must  include  supplies  in  storehouses  and 
institutions.  Where  it  is  impossible  to  give  actual  cost  of  con- 
sumption separated  into  employees  and  inmates,  the  closest 
possible  approximation  is  to  be  made.  In  cases  where  a 
food  article  is  repeated,  on  several  lines,  the  department 
must  fill  in  the  kinds  of  this  article:  for  instance,  under 
Flour:  Flour  No.  i,  Flour  No.  2.  gluten,  or  whatever  kind, 
of  flour  is  purchased,  consumed,  or  held  in  stock. 

In  the  case  of  supply  forms  to  be  used  for  all  appropria- 
tions classified  as  Forage  and  Veterinary  supplies,  the  stock 
on  hand  must  include  supplies  in  storehouses  and  in  stables. 
Supplies  for  horses  must  be  accounted  for  and  requested  on 
separate  sheets  from  supplies  for  cows,  sheep,  or  zoological 
specimens.  This  is  to  facilitate  the  estimate  of  per  capita 
cost  of  horses,  as  distinguished  from  cows,  sheep,  etc.,  in- 
cluding veterinary  service. 

The  same  is  true  with  articles  of  wearing  apparel.  Stock 
on  hand  must  include  supplies  in  storehouses  and  in  insti- 
tutions, but  not  in  use  by  patients  or  employees; 


259]  PREPARATION  AND  EXAMINATION  715 

IV.  Actual  Cost  Obtained. — Heretofore  all  published 
statements  regarding"  the  cost  of  maintaining  the  various 
departments  and  offices  have  been  based  solely  upon  bud- 
getary allowances.  But  statements  of  expenses  as  shown 
in  budget  allowances  do  not  indicate  exact  conditions,  be- 
cause in  some  cases  the  amount  provided  in  the  budget  is 
not  entirely  expended,  and  even  if  it  is  entirely  expended, 
there  may  still  be  some  goods  on  hand  which  are  bought 
out  of  this  amount.  For  this  reason,  the  supply  forms  call 
for  a  statement  of  supplies  on  hand,  for  without  this,  it  is 
impossible  to  find  a  proper  basis  on  which  to  make  appro- 
priations for  the  coming  year. 

To  calculate  the  cost  of  maintaining  the  various  depart- 
ments and  offices  on  the  sole  basis  of  budgetary  allowances 
would  be  quite  wrong  and  misleading,  not  only  because  the 
budgetary  allowances  in  some  cases  are  not  entirely  ex- 
pended, but  also  because  they  are  in  other  cases  greatly  ex-^ 
ceeded  by  the  issue  of  special  revenue  bonds,  or  by  revenues 
of  the  departments.  Therefore  it  is  absolutely  necessary  to 
require  the  departments  to  make  a  statement  of  actual  ex- 
penses during  a  fiscal  period,  to  be  used  as  the  only  reliable 
basis  on  which  to  preimise  estimates  of  the  future  or  to  com- 
pute unit  costs  or  other  statistical  data  for  the  guidance  of 
administrative  officials.  New  York  City  to-day  does  not 
depend  upon  a  mere  statement  of  audited  vouchers  or  war- 
rants drawn  in  the  determination  and  examination  of  esti- 
mates, owing  to  the  fact  that  they  do  not  indicate  the  exact 
conditions  of  expenditure.  They  frequently  include  a  large 
proportion  of  expenses  incurred  during  a  previous  fiscal 
period  and  fail  to  include  a  large  proportion  of  expenses 
incurred  during  the  current  year  which  are  not  audited  or 
paid  until  after  its  close. 

In  order  to  find  out  the  actual  condition  of  expenditures, 
expense  ledgers  have  been  installed  during  19 12  in  several 


-r6  FINANCES  OF  THE  CITY  OF  NEW  YORK  [26a 

of  the  departments,  which  have  submitted  reports  for  the 
first  six  months  of  the  past  year  to  the  comptroller,  under 
whose  direction  the  new  expense  ledgers  were  formulated 
and  installed.  From  these  reports  are  prepared  the  sum- 
mary statements  on  a  consumption  basis  of  expenses  in- 
curred against  budgetary  appropriations  and  some  other 
items  such  as  the  revenue  of  the  bridge  department,  for 
the  six  months  ended  June  30,  1913.^  These  summaries  re- 
flect the  actual  amount  of  consumption  and  is  a  necessaiy 
guide  to  the  appropriating  body  in  providing  appropriate 
amounts  for  the  same  purposes  in  the  following  year. 

The  departments  from  which  reports  from  expense  led- 
gers have  been  received  or  by  which  they  are  being  prepared, 
are  the  following: 

Docks  and  Ferries. 

Water  Supply,  Gas  and  Electricity. 

Health. 

Bellevue  and  Allied  Hospitals. 

Correction. 

Street  Cleaning. 

Fire. 

Parks — Manhattan  and  Richmond. 

Parks — Brooklyn. 

Parks — Queens. 

Parks — The  Bronx. 

Bridges. 

Armory  Board,  National  Guard  and  Naval  Militia.- 

Enough  has  been  said  to  bring  out  the  fundamental  prin- 
ciples involved  in  making  out  the  estimate  forms.  Before 
concluding,  however,  I  must  call  attention  to  the  important 

^  Budget  News  Bulletin,  no.  3,  October,  1913,  pp.  7-30. 
*  Communication  to  Mayor  Mitchel  from  Comptroller  Prendergast^ 
Jan.  2,  1914,  pp.  17-18. 


26i]  PREPARATION  AND  EXAMINATION  77 

distinction  between  "  expended,"  "  consumed/'  and  "  is- 
sued." The  word  "  expended  "  is  used  in  the  New  York 
City  budget  in  its  ordinary  dictionary  sense  and  relates  tO' 
an  expenditure  of  money  and  not  to  an  expenditure  of 
goods  or  articles  from  a  storehouse.  The  word  "  con- 
sumed "  is  to  be  used  only  for  goods  actually  consumed  and 
is  not  applied  to  goods  which  have  been  sent  on  direct  in- 
voice to  a  point  where  later  they  will  be  consumed.  Goods 
that  have  not  gone  through  a  storehouse  are  not  shown  as 
consumed,  unless  they  have  actually  been  consumed.  Goods 
which  have  gone  through  a  storehouse  and  have  been  is- 
sued are  not  shown  as  consumed,  unless  they  have  been 
consumed,  or,  in  cases  where  the  quantities  are  trivial,  the 
consumption  is  under  way. 

The  object  of  making  such  a  hair-splitting  distinction  is 
to  determine  the  actual  amount  of  goods  consumed  in  order 
to  find  out  the  proportion  available  for  the  remainder  of  the 
year,  as  well  as  to  obtain  the  actual  cost  of  maintaining  each 
department.  In  the  past,  some  departments  have  shown  as 
consumption  large  quantities  of  goods  which  were  not  con- 
sumed and  mav  not  be  consumed  for  a  vear  or  two  to  come. 
The  fact  that  broken  stone,  for  instance,  is  delivered  di- 
rectly to  a  road  that  is  to  be  repaired  should  not  be  consid- 
,ered  consumption.  Consumption  of  stone  is  its  actual  use. 
"  Expended  "  should  always  include  encumbrances  and  ob- 
ligations which  have  been  incurred,  even  if  deliveries  and 
payments  have  not  been  made. 

V.  Additional  Information  Req^uired. — In  addition  to  the 
information  contained  in  the  forms,  departments  are  re- 
quired to  furnish  a  complete  statement  concerning  every 
salary  increase  recjuested,  and  also  concerning  each  new 
position  requested.  The  former  should  give  the  full  civil 
service  history  of  the  person  for  whom  the  increase  is  re- 
quested.    It  should  show  the  duties  performed  by  the  per- 


^8  FINAXCES  OF  THE  CITY  OF  NEW  YORK  [262 

son,  and  whether  or  not  the  position  is  entirely  subordinate, 
or  if  it  entails  supervision  over  the  work  of  others.  If  the 
position  is  of  a  supervisory  nature,  the  statement  should 
show  the  number  of  employees  supervised,  their  titles  and 
general  duties.  In  short,  every  reason  for  the  proposed  in- 
crease should  be  stated.  In  regard  to  each  new  position  re- 
quested, a  full  statement  should  be  made.  Departments 
should  show  why  the  present  force  is  inadequate,  if  such  is 
the  case. 

B.    EXAMINATION    OF   DEPARTMENTAL    ESTIMATES  ^ 

I.  The  Role  Played  by  the  Examiners. — When  the  esti- 
mates are  received  from  the  departments,  examiners  in  the 
department  of  finance  analyze  them  before  they  submit 
recommendations  to  the  budget  committee  of  the  board  of 
estimate  and  apportionment.  These  examiners  are  at- 
tached to  the  office  of  the  comptroller,  but  in  budget-making 
time  they  work  under  the  direct  supervision  of  the  board 
of  estimate  and  apportionment.  This  staff  is  charged 
with  the  duty  of  helping  the  departmental  employees  to  fill 
out  the  standard  forms  with  estimates,  and  also  making  a^ 
careful  study  of  the  estimates  which  materially  affect  the 
finances  of  the  city,  and  of  which  the  budget  committee 
of  the  board  of  estimate  should  have  knowledge.  This 
knowledge  is  secured  through  the  work  of  this  permanent 
staff  of  experts.  They  have  records  and  information  avail- 
able for  use  in  making  an  anal3^sis  of  the  reasonablenessi 
and  necessity  of  requested  allowances. 

Generally,  the  work  of  analyzing  the  departmental  esti- 
mates is  not  recklessly  done.     It  is  a  product  of  careful 

*  This  part  is  largely  based  upon  the  unpublished  instructions  issued 
from  time  to  time  by  the  supervising  statistician  and  examiner  to  all 
the  examiners  as  well  as  upon  my  personal  talks  with  the  latter. 


263]  PREPARATION  AND  EXAMINATION  -q 

investigation  and  study.  Not  infrequently  some  estimates 
are  not  sent  in  until  the  last  minute,  thereby  necessitating 
hurried  study  and  in  many  cases  ill-<:onsidered  recommen- 
dations. But  as  a  rule,  there  is  sufficient  time  to  have  the 
estimates  analyzed  by  these  men  of  special  training  to  bring 
out  salient  facts  and  report  upon  conditions  and  needs  as 
determined  by  careful  investigation  and  study.  Recom- 
mendations made  by  these  men  are  submitted  to  the  board 
of  estimate  and  apportionment.  When  they  involve  hori- 
zontal "  cuts  "  under  the  original  requests,  they  do  not  re- 
flect upon  the  intelligence  of  the  officials  preparing  the  esti- 
mates. These  recommendations  are  by  no  means  free  from 
error,  but  every  effort  is  made  to  eliminate  partiality  and  to* 
recommend  only  those  things  which  have  proved  to  be  jus- 
tifiable. Moreover,  these  examiners  are  in  position  to  make 
just  and  fair  recommendations,  because  they  have  available 
to  them  cost  data,  complete  information  on  departmental 
expenses,  estimates  for  previous  years,  reasons  for  action 
taken  on  such  estimates  and  comparative  costs  of  like  work 
performed  in  different  departments,  and  if  possible,  in  other 
cities.  In  short,  they  have  all  the  tests  whereby  an  intelli- 
gent appropriating  body  may  reach  an  intelligent  conclusion 
with  respect  to  the  adequacy  or  excessiveness  of  a  requested 
allowance. 

II.  The  Justification  for  Independent  Examination  by  the 
Examiners. — It  is  not  sufficient  to  call  upon  the  heads  of 
departments  to  explain  the  requests  submitted.  Informa- 
tion is  therefore  obtained  from  sources  other  than  the  offi- 
cials requesting  the  funds,  so  that  wise  discrimination  may) 
be  exercised  in  budget-making.  Such  information  is  made 
use  of  only  after  impartial  investigation  by  the  examiners. 

While  it  is  true  that  the  estimates  made  by  the  depart- 
mental chiefs  should  carry  great  weight,  because  they  know 
more  about  the  needs  of  their  departments  than  anyone  else, 


8o  FINANCES  OF  THE  CITY  OF  NEW  YORK  [264 

local  political  conditions  are  often  such  that  they  are  busily 
occupied  with  matters  having  little  or  no  connection  with 
the  affairs  of  their  departments.  They  are  obliged  to  de- 
pend upon  the  reports  of  their  subordinates,  who  sometimes? 
lack  sound  judgment  as  to  the  real  needs  of  the  divisions, 
under  their  jurisdiction.  Even  when  they  are  thoroughly 
familiar  with  the  affairs  vv^ithin  their  organizations,  they, 
too,  sometimes  lack  the  proper  perspective  as  to  what  divi- 
sion should  be  made  of  the  appropriations  among  the  sev- 
eral functions  of  their  departments.  It  is  therefore  very 
important  to  secure  information  by  impartial  investigation 
conducted  under  the  direction  of  the  comptroller  or  the  ap- 
propriating body,  in  order  that  the  adequacy  or  inadequacy 
of  the  departmental  requests  may  be  determined.  For  in- 
stance, the  departmental  chiefs  often  make  excessive  re- 
quests for  increases  in  salaries  and  wages  and  for  additions; 
in  force.  It  is  the  duty  of  the  examiners  to  find  the  actual' 
conditions  or  facts  existing  within  the  departments,  and  see 
if  they  can  be  used  to  support  the  departmental  requests. 

Each  examiner  should  therefore  become  acquainted  with 
the  individuals  employed  in  the  departments,  should  observe 
the  work  they  are  doing  and  be  able  to  report  from  personal 
knowledge  concerning  the  individual  merits  of  employees. 
More  than  this,  he  should  make  a  careful  study  of  the  or- 
ganization of  every  division  and  sub-division  in  the  depart- 
ment assigned  to  him.  He  should  study  the  work  of  the 
various  groups  and  see  whether  it  is  being  done  efhcientl)'^ 
or  inefficiently,  whether  or  not  it  could  be  done  wath  fewer! 
men.  This  is  a  very  important  point  to  remember,  because! 
at  the  budget  committee  meetings  the  examiners  may  be 
asked  to  describe  in  detail  the  work  of  each  employee  in  a 
department.  Generalizations  are  not  accepted.  Whenever 
such  infonnation  is  required  it  must  be  specific.  Examiners 
should  therefore  have  a  memorandum  giving  the  name,  the 


265]  PREPARATION  AND  EXAMINATION  gl 

title  and  the  actual  duties  of  each  employee,  with  such  other 
facts  as  have  a  bearing  upon  the  necessity  for  the  services 
of  such  employee  or  the  rate  of  compensation  therefor. 
The  information  they  furnish  should  not  be  in  the  nature 
of  a  slightly  elaborated  civil  list,  simply  showing  the  names, 
titles,  dates  of  original  appointment  and  promotion,  but 
must  show  the  vital  facts. 

With  knowledge  of  these  facts,  the  examiners  are  able 
to  go  over  the  forms  filled  out  by  the  departments  and  to 
judge  if  the  requests  made  by  them  for  increases  and  de- 
creases in  wages  and  salaries,  and  for  additions  and  reduc- 
tions in  force  are  reasonable  and  justifiable.  If  they  are, 
they  are  recommended  to  the  budget  committee  of  the 
board  of  estimate  and  apportionment;  if  they  are  not,  they 
are  disapproved. 

III.  The  Problem  Reducible  to  Seven  Simple  Elements. — ' 
The  main  thing  the  examiners  ought  tO'  know  is  the  apiount 
of  money  the  city  should  appropriate  for  the  efficient  oper- 
ation of  governmental  machinery',  the  adequate  mainten- 
ance of  city  property  and  the  construction  of  necessary  and 
desirable  improvements.  The  problem  naturally  reduces 
itself  to  seven  simple  elements,  as  follows: 

1.  Work. 

2.  Workers. 

3.  Rate  of  Pay. 

4.  Tools. 

5.  Supplies. 

6.  Materials. 

7.  Prices  of  Tools.  Supplies  and  Materials. 

The  first  and  most  important  fact  to  be  determined  is  the 
volume  of  work  to  be  done,  which  should  be  expressed  in 
standard  units  of  measure  and  should  be  divided  into  classes 
according  to  the  nature  of  the  thing  to  be  done. 


82  FINANCES  OF  THE  CITY  OF  NEW  YORK  [266 

The  next  most  important  fact  to  be  determined  by  the 
examiners  is  the  number  of  employees  necessary  to  do  the 
work,  the  employees  being  divided  into  classes  according  ta 
the  nature  of  the  work  they  have  to  do.  But  before  they 
can  determine  how  many  employees  are  necessary,  the  ex- 
aminers must  ascertain  the  number  of  units  of  work  the 
average  employee  of  each  class  ought  to  perform  in  a  day. 
After  this  is  done,  they  then  determine  the  number  of  days' 
of  work  for  each  class  of  employees  to  do,  and  by  fixing 
the  number  of  working  days  in  a  year  they  determine  the 
number  of  workers  necessary. 

The  rate  of  compensation  for  each  class  and  grade  of 
employee  is  the  next  step.  For  this,  the  examiners  rely 
largely  upon  the  committee  on  standardization  of  salaries 
and  grades,  but  they  must  make  independent  recommenda- 
tions. 

The  tools  must  be  considered  in  connection  with  the  vol- 
ume of  work  and  the  number  of  workers.  By  using  the 
most  modern  equipment,  the  number  of  workers  may  be 
materially  reduced.  Best  tools  should  be  provided  at  the 
lowest  possible  price. 

The  question  of  supplies  is  more  important  than  ever  be- 
fore, because  of  the  enormous  savings  that  can  be  made  in 
this  one  item  of  expenditure  if  the  quality,  price  and  quan- 
tity of  supplies  can  be  properly  controlled.  The  examiners 
are  required  to  make  sure  that  all  the  necessary  supplies  areS 
purchased  at  the  lowest  possible  prices. 

It  is  not  so  difficult  to  ascertain  the  proper  quantities  of 
materials  as  it  is  to  ascertain  the  proper  quantities  of  sup^ 
plies,  for  the  reason  that  materials  cannot  be  so  easily  wasted 
or  misused.  However,  it  is  a  large  part  of  the  examiners' 
problem  to  ascertain  just  the  kind,  the  quantity  and  the 
proper  prices  of  materials  needed  to  do  the  work. 

The  examiners  should  study  work  methods  and  seek  to 


267]  PREPARATION  AND  EXAMINATION  83 

introduce   into  all   departments   the  methods   which   have 
demonstrated  their  superiority. 

The  important  facts  which  should  be  determined  by  the 
examiners  can  be  restated  in  more  detailed  form,  as  follows: 

1.  Number  of  units  of  work  to  be  done. 

2.  Classes  of  employees  necessary  to  do  the  work. 

3.  Number  of  units  of  work  to  be  done  by  each  class  of 
employees. 

4.  Number  of  units  of  work  the  average  employee  of  each 
class  ought  to  perform  in  a  day. 

5.  Number  of  days  of  work  for  each  class  of  employees. 

6.  Rate  of  compensation  for  each  class  of  employees. 

7.  The  kind,  quality  and  quantity  of  supplies,  material  and 
equipment  necessary  for  the  performance  of  the  work  to  be 
done. 

8.  Lowest  market  prices  for  all  the  kinds  of  supplies,  ma- 
terials and  equipment. 

9.  The  best  methods  of  performing  the  work.  ; 

An  intelligent  coordination  of  all  these  facts  would  form 
the  soundest  basis  not  only  for  budget  appropriations,  but 
for  departmental  administration.  In  securing  all  these 
facts,  it  is  absolutely  necessary  to  procure  the  cooperation 
of  the  departmental  head  and  his  subordinates.  It  will  be 
necessary  to  make  a  thorough  study  of  the  organization  and 
the  working  methods  of  departments,  and  if  such  a  study  is 
to  produce  good  results,  it  must  be  made  with  the  sympathy 
and  support  of  departmental  heads.  But  there  can  be  no 
sympathy  and  support  unless  the  examiners  can  convince 
them  that  they  are  not  trying  to  usurp  their  authority  but 
that  their  sole  purpose  is  to  help  them  and  to  help  the  city. 
The  examiners  would  defeat  their  own  purpose  if  they 
should  approach  the  departmental  heads  with  the  arrogant' 
assumption  that  they  know  all  there  is  to  know  about  cerw 
tain  kinds  of  work  and  overlook  the  fact  that  a  depart- 


84  FINANCES  OF  THE  CITY  OF  NEW  YORK  [268 

mental  inspector  who  has  been  inspecting  construction  work 
for  twenty-five  or  thirty  years  knows  the  duties  of  his  posi- 
tion as  well  as  the  examiners  themselves.  The  only  advan- 
tage the  examiners  in  the  finance  department  have  over 
the  departmental  inspectors  is  that  they  have  had  a  more 
varied  experience  than  any  other  inspectors  in  the  city,  be- 
cause they  have  been  required  to  pass  upon  every  variety 
of  engineering  work.  Thus,  they  are  in  a  position  to  wit-^ 
ness  the  activities  of  all  departments,  to  contrast  the  good 
with  the  bad  and  to  make  profitable  use  of  the  mistakes  of 
one  department  and  the  high  accomplishment  of  another. 
Moreover,  through  the  dissemination  of  important  facts, 
they  can  give  the  departmental  officials  a  bird's  eye  view 
of  the  activities  of  the  entire  city,  so  that  they  may  profit 
by  the  best  examples  before  them.  It  has  been  found  to  be 
a  fact  that  departmental  employees  are  very  anxious  to 
learn  the  best  methods.  They  know  there  may  be  easier 
and  cheaper  ways  of  doing  the  things  they  are  doing — waysi 
which  they  have  not  found,  but  which  some  other  man  in 
another  department  or  another  city  has  discovered.  It  is 
the  business  of  the  examiners  to  make  departmental  em- 
ployees familiar  with  the  better  methods. 


CHAPTER  III 

Hearings  on^  Voting,  Funding  and  Administering  the 

Budget 

A.  hearings  on  the  budget 

I.  Publicity  through  the  Press,  Budget  News  Bulletins 
and  the  City  Record. — It  is  of  great  importance  to  publish 
the  departmental  estimates  in  the  City  Record  far  in  ad- 
vance of  the  public  hearings  on  the  tentative  budget,  in 
order  to  arouse  the  interest  of  the  citizens.     Failure  to  do 
this  will  lead,  and  has  led  in  the  past,  to  an  insufficient  dis- 
cussion of  the  departmental  requests.     Although  about  one 
million  people  visited  the  budget  exhibit  held  in  1911,  the 
public  interest  in  the  budget  itself  seemed  to  be  small,  as 
was  shown  by  the  fact  that  less  than  twenty-five  citizens 
attended  the  first  of  the  two  public  hearings  in  that  year. 
At  this  hearing,  almost  the  entire  discussion  was  concerned 
with  the  opposition  of  the  real  estate  interests  to  any  in- 
crease  for  the  tenement  house  department.     The  second 
hearing  was  marked  merely  by  a  heated  debate  on  the  pro- 
posal for  the  establishment  of  seventy-one  municipal  milk; 
stations.     The  reason  for  the  lack  of  public  interest  in  the 
budget  was  that  the  newspapers  did  not  make  a  conspicuous 
announcement  of  the  public  hearings.     Many  of  the  de- 
partmental estimates  were  not  even  published  in  the  City 
Record  for  distribution  until  October  27th,  the  very  day 
on  which  the  public  hearing  on  the  tentative  budget  took 
place. ^ 

1  See  an  article,  K earing   the  $200,000,000   city,  in   Survey,   1911-12, 
27,  pp.  1184-1187. 

269]  85 


86  FINANCES  OF  THE  CITY  OF  NEW  YORK  [270 

To-day,  in  addition  to  the  publication  of  estimates  in  the 
City  Record,  information  about  budget-making  is  furnished 
to  the  public  by  the  board  of  estimate  and  apportionment 
through  a  series  of  publications  called  "'  the  Budget  News 
Bulletins."  After  the  departmental  estimates  are  received 
and  analyzed  in  detail  by  the  examiners  in  the  bureau  of 
municipal  investigation  and  statistics  of  the  department 
of  finance,  comparisons  of  the  amounts  requested  for  1914 
with  the  amounts  allowed  for  191 3  are  made  and  printed  in 
the  Bulletins,  showing  the  increase  or  decrease  in  the; 
amounts  requested  and  allowed  for  each  functional  unit  of 
the  various  departments,  bureaus  and  offices  within  the  city 
and  county  governments.  The  amounts  requested  for  per- 
sonal service  are  distinguished  from  those  requested  for 
expenses  other  than  personal  service,  such  as  supplies,  ma- 
terials, equipment,  etc. 

These  bulletins  are  printed  and  distributed  from  time  to 
time  during  the  month  of  October  among  the  various  tax- 
payers' associations  and  other  civic  organizations,  in  order 
that  the  contents  may  receive  sufficient  consideration  from 
the  public  before  the  tentative  budget  is  presented  to  the 
board  of  estimate.  The  latter  is  desirous  of  receiving  as- 
sistance and  cooperation  from  these  organizations  in  the 
way  of  constructive  suggestions  which  may  prove  valuable 
in  preparing  the  tentative  budget  for  its  own  consideration. 

In  speaking  of  the  actual  cost  of  maintaining  each  depart- 
ment in  the  preceding  chapter,  I  pointed  out  that,  hereto-* 
fore,  all  published  statements  as  to  the  cost  of  maintenance 
of  the  various  departments  and  offices  were  based  solely 
upon  budgetary  allowances.  For  this  reason,  they  do  not 
show  the  exact  conditions  of  departmental  expenditure,  be- 
cause not  all  of  the  sums  included  in  the  budget  appropria4 
tions  are  expended,  the  balances  returning  to  the  general 
fund  for  the  diminution  of  taxation,  and  also  because  in 


271]  ADMINISTERING  THE  BUDGET  87 

many  cases,  the  budgetary  appropriations  are  every  year 
augmented  by  the  issue  of  special  revenue  bonds,  amounting 
approximately  to  $5,000,000  per  annum.  The  expenditures 
from  the  special  revenue  bond  funds  are  substantially  all 
for  regular  maintenance,  but  they  are  not  allocated  in  the 
budget  by  departments.  Therefore,  in  the  first  number  of 
the  News  Bulletins,  there  were  printed  some  expenditures 
statements,  in  which  the  disbursements  from  the  special 
revenue  bond  funds  were  allocated  by  departments,  in  order 
to  ascertain  the  real  cost  of  maintaining  them. 

In  addition  to  the  expenditures  made  directly  from  spe- 
cific budgetary  appropriations  and  the  proceeds  of  special 
revenue  bonds,  there  are  also  certain  administrative  and 
maintenance  expenses  which  are  met  out  of  special  funds: 
not  in  any  way  reflected  in  the  yearly  budgets,  as,  for  in- 
stance, in  the  department  of  water  supply,  Brooklyn,  where 
approximately  $2,000,000  is  spent  each  year  from  the  revei- 
nues  of  the  department.  No  actual  cost  of  maintenance  and 
operation  of  the  various  departments  can  therefore  be 
shown  unless  all  these  extra-budgetary  appropriations  are 
taken  into  account.  The  information  necessary  to  showing 
the  actual  cost  is  furnished  by  these  News  Bulletins.^ 

II.  Publicity  Through  Budget-Exhibit. — In  1910  and 
191 1,  about  four  weeks  in  advance  of  the  public  hearings 
on  the  tentative  budget.  New  York  City  held  what  is  known 
as  the  Budget  Exhibit,  which  proved  to  be  a  valuable  short 
cut  in  training  the  citizens  in  the  art  of  studying  municipal 
affairs  and  analyzing  municipal  expenditures.  With  the 
size  of  the  population  and  the  complexity  of  the  city  gov-i 
ernment,  involving  each  year  an  expenditure  of  approxi-i 

1  There  were  published  in  1913  a  series  of  five  News  Bulletins,  which 
not  only  gave  full  information  regarding  the  actual  condition  of 
departmental  expenditures,  but  also  furnished  the  basis  on  which  to 
calculate  the  departmental  needs  for  the  following  year. 


88  FINANCES  OF  THE  CITY  OF  NEW  YORK  [272 

mately  $200,000,000.  an  average  man  would  find  himself 

lost  in  the  intricacy  of  municipal  affairs,  and  unable  to  esti-- 

mate  what  had  really  been  accomplished  in  return  for  the 

millions  of  taxes  spent.    He  would  not  be  able  to  understand 

the    voluminous    official    reports,    even    when    put    in    the 

abridged  form  seen  in  the  newspapers.  On  the  contrary, 
in  some  cases,  they  add  only  to  the  perplexities  in  regard  to 

city  affairs.  The  Budget  Exhibit,  with  its  charts,  maps  and 
tabulations,  served  to  inform  the  public  of  what  has  been 
done  with  the  taxpayers'  money,  by  fixing  the  principal  out- 
lines of  work  in  the  mind  pictorially,  "  thus  creating  a  back-- 
ground  of  general  intelligence,  against  which  the  citizen  can 
follow  the  daily  affairs  of  the  city  in  his  newspapers."  ^  As 
to  the  maps,  charts,  etc.,  a  few  examples  may  be  taken  to  il- 
lustrate their  efficacy  and  usefulness.  For  instance,  they 
showed  that  certain  departments  had  paid  $10.00  for  twenty 
Welsbach  burners,  which  were  bought  by  the  Bureau  of 
Municipal  Research  for  only  $5.20;  had  paid  $10.40  for 
twenty-six  gas  mantles  for  which  the  bureau  paid  only 
$5.20;  had  paid  $3.00  for  a  gas  fixture  which  was  sold  in 
the  market  for  only  45  cents.  They  also  showed  that  in 
1907,  it  cost  the  city  $19,707.25  to  keep  the  City  Hall 
"  clean,"  while  an  offer  had  been  received  from  a  cleaning 
company  to  do  the  same  kind  of  cleaning  for  the  city  for 
$1,800  a  year." 

The  Budget  Exhibit  served  not  only  to  inform  the  public 
of  the  municipal  expenditures,  but  also  to  enable  the  fiscal 
authorities  to  get  facts.  "  It  is  more  true  that  the  member^ 
of  the  board  of  estimate  and  apportionment  are  anxious 
to  have  facts  submitted  by  taxpayers  and  more  ready  to  con- 
sider these  facts  frankly  and  critically  than  are  taxpayers  tO) 

^  Brooklyn  Eagle,  October  2,  191 1. 

'  Outlook  go,  November  7,  1908,  p.  512. 


273]  ADMLMSTERING  THE  BUDGET  gg 

present  the    facts.      This   is   not   strange   because   it  costs 
money  to  get  facts."  ^ 

The  idea  originated  by  New  York  City  of  holding  a  bud- 
get exhibit  has  been  adopted  by  about  a  dozen  other  cities. 
In  Chicago,  for  example,  there  was  held  in  September,  191 1, 
a  large  and  most  comprehensive  exhibit,  known  as  the  In- 
ternational Municipal  Congress  and  Exposition.     During 

1912,  many  other  cities,  including  Cincinnati,  Philadelphia, 
Chicago,  and  Greenwich,  Connecticut,  held  expositions  of  a 
similar  character,  although  sometimes  not  so  comprehensive 
in  scope  as  that  in  New  York  City.  It  was  soon  discovered 
that  "  to  make  an  effective  exhibit  of  all  the  city  depart- 
ments at  one  time  was  an  expensive  and  difficult  undertak- 
ing." Consequently,  a  new  plan  has  been  devised  under 
which  the  city  departments  are  to  be  taken  up  one  after  the 
other,  in  order  to  show  to  the  taxpayers  in  a  more  simple 
way  just  what  the  departments  under  exhibition  had  done 
and  are  required  to  do.  Thus,  the  Child  Welfare  Exhibit 
and  the  Fire  Exposition  in  New  York  City,  the  Health 
Exhibit  in  Chicago,  the  Water  Conservation  Exhibit  in 
Philadelphia,  and  the  Educational  Exhibit  in  Greenwich. 
Conn.,  are  some  of  the  most  notable  instances  of  the  new 
plan.-  One  of  the  most  profitable  features  of  these  muni- 
cipal expositions  is  the  public  lectures  given  by  the  heads 
of  the  city  departments  concerned. 

III.  Public  Hearings  on  the  Estimates. — The  tentative 
recommendations  made  and  submitted  by  the  examiners  to 
the  board  of  estimate  and  apportionment  should  now  re- 
ceive proper  consideration.  Trusting  that  the  taxpayers 
are  thoroughly  informed  by  the  press,  Budget  News  Bulle- 
tins and  budget  exhibit,  the  budget  committee  of  the  board 

^  Herald,  October  i,  191 1, 

-  The  American  Political  Science  Reviezv,  vol.  vii,  no.  i.  February. 

1913,  pp.  107-108. 


QO  FINANCES  OF  THE  CITY  OF  NEW  YORK  [274 

designates  certain  days  for  hearings  on  the  estimates.  These 
hearings  are  attended  by  commissioners  and  other  repre- 
sentatives of  the  departments  on  one  side  and  the  examiners, 
of  the  department  of  finance  on  the  other.  The  former 
argue  for  the  estimates  as  they  are  and  the  latter  argue  for 
the  estimates  as  they  think  they  should  be.  In  19 13,  these 
hearings  were  held  from  October  first  to  October  thirty- 
first,  the  ver)'  day  on  which  the  budget  is  required  by  the 
charter  to  be  voted  by  the  board  of  estimate  and  appor- 
tionment. A  separate  hearing  is  held  for  each  department, 
in  order  to  enable  the  taxpayers  to  make  a  careful  study  of 
the  estimates  of  each  department,  so  that  they  can  demand 
facts  to  prove  either  that  the  requested  increases  are  abso-v 
lutely  necessary  or  that  reductions  cannot  be  made  below 
the  appropriations  for  the  surrent  year.^ 

IV.  The  Tentatwe  Budget  and  Hearing. — While  the  bud- 
get exhibit  is  going  on,  or  while  the  estimates  published  irt 
the  City  Record  and  Budget  News  Bulletins  are  analyzed 
and  studied  by  the  taxpayers  and  while  public  hearings  on 
the  estimates  are  held,  there  is  in  process  of  preparation  a 
tentative  budget  under  the  direction  of  the  board  of  esti- 
mate and  apportioraiient.  Its  object  is  to  show  what  the 
members  of  the  board  propose  to  vote  for,  unless  the  tax-i 
payers  have  reasons  to  ask  for  adjustments.  That  is  to  say, 
the  recommended  additions  and  reductions  are  granted,  un- 
less the  taxpayers  cause  them  to  change  their  minds.  Thus,, 
the  tentative  budget  for  19 14,  as  prepared  by  the  budget 
committee,  shows  a  total  decrease  of  $4,639,196.35,  which 
is  made  up  of  a  cut  of  $3,796,717.92  in  the  tax  levy  por- 
tion of  the  budget  and  $842,478.43  in  that  portion  of  the 
budget  chargeable  to  funds  other  than  tax  levy.     However,, 

^  See  a  leaflet,  No  Matter  Who  is  Elected,  no.  20,  published  by  Bureau 
of  Municipal  Research,  Oct.  4,  1913. 


275]  ADMINISTERING  THE  BUDGET  qI 

this  figure  is  arrived  at  without  taking  into  consideration 
the  three  appropriations  for  the  department  of  education, 
charitable  institutions  and  debt  service/  These  large  re- 
ductions are  the  result  of  a  systematic  study  of  depart- 
mental organization  and  departmental  needs,  which  was 
made  under  the  direction  of  the  Budget  Committee  by  a 
permanent  staff  of  engineers,  examiners  and  expert  ac- 
countants in  the  bureau  of  municipal  investigations  and  sta- 
tistics in  the  department  of  finance.  The  reduction  in  the 
other  funds  portion  of  the  budget,  though  smaller  in 
amount,  is  nevertheless  a  good  indication  of  the  city's  efforts 
to  secure  an  economical  administration,  because  a  reduction 
of  a  single  dollar  borrowed  for  fifty  years  is  in  its  effect 
equal  to  a  reduction  of  three  dollars,  because  every  dollar 
borrowed  on  a  fifty-year  bond  imposes  a  burden  upon  the 
taxpayers  three  times  as  heavy  as  that  imposed  by  a  dollar 
raised  by  taxation.  For  this  reason,  the  reduction  in  the 
salary  and  wage  schedules  chargeable  to  corporate  stock  is 
of  more  essential  importance  than  a  reduction  in  the  tax 
levy  portion.  If  it  is  impossible  to  make  a  reduction  in  the 
corporate  stock  allowance,  it  would  still  be  more  economical 
to  transfer  the  charge  from  corporate  stock  to  tax  levy  ac- 
counts. Realizing  the  importance  of  this  principle,  the 
board  of  estimate  and  apportionment  transferred  for  1914 
the  topographical  bureaus  of  four  boroughs  and  other 
forces  heretofore  charged  to  corporate  stock  to  tax  levy  ac- 
counts. 

The  public  hearing  on  the  tentative  budget  is  a  unique 
feature  of  budget-making  in  New  York  City.  It  is  practi- 
cally unknown  except  in  New  York  and  was  not  known 

1  See    a   pamphlet,    The    Tentative    Budget   for    1914,    published    by 
the  Board  of  Estimate  and  Apportionment,  p.  i. 

*  Ibid.,  p.  2. 


g2  FINANCES  OF  THE  CITY  OF  NEW  YORK  [276 

even  in  New  York  until  1908.^  Civic  organizations  and 
taxpayers'  associations  appear  to  argue  for  or  against  the 
tentative  allowances.  While  arguing  that  the  departmental 
estimates  are  in  excess  of  the  probable  budget,  the  burden 
of  proof  rests  on  the  taxpayers;  but  when  the  provisional 
budget  is  under  discussion,  the  burden  of  proof  rests  on  the 
city  officials  who  are  about  to  vote  for  it,  because  they  must 
give  reasons  Vv^hy  they  vote  for  it.  The  tentative  budget  is 
now  published  far  in  advance  of  the  public  hearing  on  it  in 
order  to  permit  analysis  and  discussion  by  the  taxpayers 
and  citizens  whose  interests  are  affected  by  it. 

B.  VOTING  THE  BUDGET 

I.  The  Procedure  of  Voting. — After  all  the  arguments 
for  and  against  the  tentative  budget  have  been  heard,  and 
necessary  changes  made,  it  is  then  put  to  vote  by  the  board 
of  estimate  and  apportionment,  composed  of  the  mayor, 
comptroller,  president  of  the  board  of  aldermen,  and  the 
presidents  of  the  boroughs  of  Manhattan,  Brooklyn,  the 
Bronx,  Queens  and  Richmond.  The  mayor,  the  comp- 
troller and  the  president  of  the  board  of  aldermen  are 
each  entitled  to  cast  three  votes;  the  presidents  of  the  bor- 
oughs of  ^Manhattan  and  Brooklyn,  to  cast  two  votes  each, 
and  the  presidents  of  the  boroughs  of  the  Bronx,  Queens 
and  Richmond,  to  cast  one  vote.  The  Charter  does  not 
specifically  state  how  many  members  of  this  board  shall  con- 
stitute a  quorum,  but  it  does  say  that  a  quorum  of  this  board 
should  "  consist  of  a  sufficient  number  of  the  members 
thereof  to  cast  nine  votes,  of  whom  at  least  two  of  the  mem- 
bers hereby  authorized  to  cast  three  votes  each  shall  be 
present."  "     The  budget  is  determined  upon  by  resolution 

1  See    an    article,    Hoiv    to    Keep    Watch    on    the    City    Budget,    by 
William  H.  Allen,  in  Standard  Real  Estate  A)inual,  no.  2,  vol.  2. 
'  New  York  Charter  (Greater  New  York),  section  226. 


277]  ADMINISTERING  THE  BUDGET  93 

adopted  by  majority  vote,  before  midnight  October  31st. 
Within  five  days  after  being  adopted  by  the  board  of  esti- 
mate and  apportionment,  it  must  be  submitted  to  the  board 
of  aldermen,  which  body  is  given  power  to  reduce  or  elimi- 
nate any  items  but  may  not  increase  or  add  to  the  budget  as 
passed  by  the  board  of  estimate.  Action  by  the  board  of 
aldermen  is  required  to  be  taken  before  November  25th. 
The  budget  is  then  submitted  to  the  mayor,  who  may  veto 
any  action  taken  by  the  board  of  aldermen,  but  that  body, 
by  a  three-fourths  vote,  may  pass  the  budget  over  any  vetO' 
of  the  mayor. 

II.  Cutting  Doivn  the  Yearly  Increase  as  a  Result  of  Bud- 
getary Reforms. — The  object  of  a  segregated  budget,  as  we 
know,  is  to  eliminate  those  items  which  represent  waste. 
Indeed,  segregation  in  New  York  City  has  resulted  in  cut- 
ting down  the  net  increase  every  year  from  $13,000,000,  as 
was  the  case  in  1906  and  in  1907  to  less  than  $4,500,000  in 
1908.^  In  1909,  the  payrolls  which  had  been  padded  for 
unlawful  purposes  and  which  grew  up  to  the  immense  figure 
of  $90,000,000  in  19 1 2,  were  for  the  first  time  scheduled 
and  itemized.  In  the  following  year,  the  same  method  of 
scheduling  and  itemizing  appropriations  was  applied  to  the 
purchase  of  supplies  for  all  the  departments,  costing  the 
city  over  $22,000,000  a  year.  Thus,  the  methods  by  which 
payrolls  had  been  diverted  were  revealed  and  checked  by 
functional  segregation  and  their  balances  which  had  hitherto 
been  employed  to  augment  the  salaries  of  favorites,  were 
credited  to  the  general  fund  for  the  diminution  of  taxa- 
tion. Thus,  in  1909,  with  only  a  partial  segregation,  the 
unexpended  salaries  and  wages,  which  were  turned  back 
into  the  general    fund,  aggregated  $1,081,748  as  against 

1  See  Proceedings  of  the  17th  National  Conference  for  Good  City 
Government,  and  the  15th  Annual  Meeting  of  the  National  Municipal 
League,  p.  289  under  the  the  subject  of  Municipal  Research. 


94  FINANCES  OF  THE  CITY  OF  NEW  YORK  [278 

$314,760  in  the  year  previous.  In  19 10,  they  amounted  to 
$1,958,730;  in  191 1,  $1,391,185/  Further,  the  increases 
in  the  salary  and  wage  appropriations,  averaging  $4,000,- 
000  to  $5,000,000  annually,  have  been  reduced  to  an  average 
of  $2,662,744  for  the  three  years  previous  to  1912,  apart, 
however,  from  the  mandatory  increase  of  $3,850,000  as  re- 
quired by  the  Teachers'  Equalization  Pay  Bill." 

The  result  of  a  segregated  budget  is  better  shown  by  the 
very  small  percentage  of  increase  in  the  1914  budget  over 
the  19 1 3  budget.  Fifty  divisions  of  the  city  government 
have  been  allowed  less  money  in  1914  than  in  191 3  ;  yet  this 
reduction  was  regarded  as  the  best  way  to  get  more  and 
better  service.  The  total  budget  increase  for  all  depart- 
ments not  including  a  $3,000,000  increase  for  public  schools 
is  more  than  offset  by  the  budget  reductions,  and  it  is  said 
that  they  illustrate  the  principle  of  increasing  the  quality 
and  quantity  of  work  with  less  money.  Moreover,  these 
reductions  include  $4,250,000  for  continuing  teachers'  equal 
pay  for  equal  work  and  raising  the  minimum  salary  for 
policemen  and  firemen  from  $800  to  $1,000,^  over  $450,000 
for  additional  patrolmen  and  innumerable  other  extensions 
of  service,  such  as  milk  stations,  efficiency  bureaus,  efficiency 
stafif,  bureau  of  fire  prevention,  clearing  house  for  feeble- 
minded, etc.,  and  nearly  $2,000,000  legally  mandatory  in- 
creases, apart  from  teachers'  increments. 

$1,300,000  was  taken  from  the  1913  allowances  and  $8,- 
000,000  was  cut  from  the  1914  budget  estimates,  not  "with 
an  axe,"  but  after  a  very  careful  study  of  the  real  needs  of 

1  Annual  Report  of  the  New  York  Chamber  of  Commerce,  1912-13, 
p.  48. 

» Ibid. 

*  See  a  leaflet,   Budget  Reminders  and   Remainders,   issued   by  the 
Bureau  of  Municipal  Research,  November  i,  1913. 


279]  ADMINISTERING  THE  BUDGET  g^ 

the  departments,  conducted  by  non-partisan  and  non-elec- 
tive employees  who  work  in  the  interests  of  the  taxpayers. 
For  instance,  $492,000  was  subtracted  from  the  water  de- 
partment, resulting  from  a  cooperative  study  by  the  depart- 
ment itself,  by  the  official  bureau  of  municipal  investiga- 
tion and  statistics,  and  by  the  unofficial  Bureau  of  Municipal 
Research.  Similarly,  $600,000  was  cut  from  the  school  sal- 
ary accruals,  $292,000  from  docks  and  ferries,  $30,000 
from  Manhattan  parks,  $93,000  from  Brooklyn  parks, 
$40,000  from  the  Bronx  parks,  $39,000  from  Queens  parks, 
$20,000  from  the  Manhattan  budget  which  had  already 
been  many  times  decreased,  $216,000  from  Richmond, 
$142,000  from  finance  department,  $54,000  from  the  board 
of  estimate,  $42,000  from  the  board  of  aldermen,  $10,000 
fram  the  law  department,  $38,000  from  the  City  Record, 
$76,000  from  street  cleaning,  $12,000  from  public  charities, 
$179,000  from  the  bridge  department,  $42,000  from  the 
tenement-house  department,  $142,000  from  the  fire  depart- 
ment, $5,000  from  the  ambulance  service,  and  $842,000 
from  payrolls  heretofore  charged  to  corporate  stock.  All 
these  cuts,  not  below  the  estimates,  but  below  the  191 3 
spending  base,  were  made  as  a  result  of  painstaking  study. 
$192,996,000  was  the  final  budget  for  19 14,  including  $1,- 
252,000  for  city  debt  increase,  showing  a  total  net  increase 
of  $284,000  above  the  19 13  budget.^ 

The  result  of  budgetary  reforms  is  still  more  vividly 
shown  in  the  amount  of  decreased  annual  increase  for  city 
purposes.  In  comparing  the  following  figures,  it  is  im- 
portant to  remember  that  New  York  City  began  the  appli- 
cation of  scientific  methods  to  budget-making  in  1908. 

1  See  a  leaflet,  op.  cit. 


96  FINANCES  OF  THE  CITV  OF  NEW  YORK  [280 

1903  -  8  8.38%  increase 

1908-13  5-25%      " 

1910-13  4-23%       " 


1913-14  1-83% 


1 


III.  Double  Responsibility  of  the  Elective  Officers. — It 
is  certainly  in  violation  of  the  fundamental  principles  of  a 
democratic  form  of  government  to  place  the  power  to  vote 
money  in  the  hands  of  those  who  are  authorized  to  spend  it. 
Such  a  blending  of  powers,  however,  seems  to  have  been 
sanctioned  by  the  long-observed  custom  in  New  York  City 
that  all  matters  relating  to  the  finances  of  the  city  shall  be 
decided  by  the  eight  elective  officers  constituting  the  board 
of  estimate  and  apportionment.  The  mayor,  the  comptroller 
and  the  president  of  the  board  of  aldermen  are  elected  by 
the  voters  of  the  city,  while  the  five  borough  presidents  are 
elected  by  the  voters  of  the  five  boroughs  respectively.  In- 
dividually, they  assume  the  spending  responsibility,  whereas 
collectively,  they  shoulder  the  voting  responsibility."  We 
shall  presently  see  to  what  extent  they  are  each  responsible 
for  spending  money. 

IV.  Controllable  and  Uncontrollable  Budgetary  Items. — 
The  double  responsibility  of  the  board  of  estimate  and  ap- 
portionment leads  people  to  believe  that  New  York  City, 
though  governed  by  a  mayor,  has  really  taken  on  a  commis- 
sion form  of  government,  because  almost  all  the  powers  of 
regulating  the  city's  affairs  are  lodged  in  the  board  of  esti- 
mate and  apportionment.  It  has  the  entire  power  tq  make 
the  annual  budget,  subject  only  to  reduction  by  the  board 
of  aldermen.     This  view  is,  however,  far  from  being  true. 

1  See  a  leaflet,  Scientific  Budget-making  vs.  Riile-of -thumb  Budget- 
making,  published  by  the  Bureau  of  Municipal  Research,  Nov.  12,  1913. 

2  See  a  leaflet,  No  Matter  Who  Is  Elected — No.  14,  on  Democratic 
platform  promises  of  economy  and  efficiency  in  spending  money, 
Bureau  of  Municipal  Research,  Aug.  23,  1913. 


28l]  ADMINISTERING  THE  BUDGET  gy 

The  budget  is  made  up  of  both  controllable  and  uncon- 
trollable expenditures,  i.  e.,  of  mandatory  and  discretionary 
items.  The  former  are  fixed  by  the  acts  of  the  legislature 
and  are  therefore  beyond  the  control  of  the  board  of  esti- 
mate. A  good  illustration  of  this  is  the  three-mil^,  tax 
which  the  city  must  levy  for  educational  purposes,  or  the 
legally  binding  commitments,  such  as  the  debt  service.  The 
latter  are  those  items  w^hich  the  board  of  estimate  and  ap- 
portionment may  deny,  but  never  does,  as  for  example,  the 
minimum  allowances  for  running  the  necessary  business  of 
the  city  or  those  providing  for  the  extension  of  activities 
or  the  enlargement  of  working  forces. 

The  largest  item  of  expenditure,  which  is  controllable  in 
its  origin,  becomes  uncontrollable  once  the  initial  step  is 
taken,  viz.,  the  debt  service.  The  growth  of  the  city  debt 
charge  is  responsible  for  approximately  one-third  of  the 
growth  of  the  total  budget.  In  191 3  it  amounted  to  $54,- 
977,381.34,  or  28.53  V^^  cent  of  the  total  budget. 

The  next  largest  item  in  the  budget  is  for  educational 
purposes.  In  191 3,  the  budget  for  the  department  of  edu- 
cation was  over  $35,000,000.  Of  this  sum,  about  $24,500.- 
000,  or  approximately  70  per  cent,  was  a  mandatory  charge 
representing  the  product  of  the  three-mill  school  tax.  Since 
1908,  the  discretionary  part  of  the  school  budget  has  in- 
creased $4,265,321.83,  or  67.41  p€r  cent.^ 

The  third  uncontrollable  item  in  the  budget  is  the  state 
taxes  which  amounted  to  $7,947,031.96  in  1913.^  Economy 
in  the  expenditure  of  the  state  funds,  though  in  a  large 
measure  governed  by  the  people  of  New  York  City,  is 
nevertheless  entirely  independent  of  the  city  authorities. 

^  Henry    Bruere,    Cost    of   Govcrnmeni    in    N.    Y.    C.    published   by 
Record  and  Guide  Company,  New  York,  1913,  p.  9. 
•  Ibid. 


g8  FINANCES  OF  THE  CITY  OF  NEW  YORK  [282 

The  fourth  uncontrollable  item  is  the  mandatory  impost 
on  the  New  York  City  taxpayers  for  county  purposes, 
amounting  to  $6,234,661.86.^  Nominally,  the  regulation  of 
the  county  expenditures  is  within  the  power  of  the  city  offi- 
cials, but  practically  the  control  is  exercised  by  the  legis- 
lature. 

In  addition  to  these  four  mandatory  items,  there  are  num- 
erous others  of  the  same  nature,  as  for  example,  the  city's 
contribution  to  the  police  pension  fund.  This  contribution 
amounted  in  1913  to  $1,264,538. 34." 

The  deduction  of  the  foregoing  items  from  the  total  bud- 
get for  1913  leaves  approximately  $85,(X)0,ooo  as  the  por- 
tion of  the  budget  over  which  the  iiiembers  of  the  board  of 
estimate  individually  or  collectively  had  more  or  less  com- 
plete control. 

The  mayor  has  full  power  to  compel  economy  in  certain 
departments,  partial  power  in  others  and  only  moral  influ- 
ence over  a  considerable  proportion  of  the  expenditures. 
As  the  mayor  occupies  a  commanding  position  in  the  ad- 
ministration of  city  affairs,  this  moral  influence  can  be  made 
very  powerful.  He  has  complete  control  over  54  per  cent 
of  the  expenditures  for  city  purposes  through  the  use  of  his 
power  of  appointment  and  removal  and  incomplete  control 
over  38  per  cent.  Concerning  a  considerable  portion  of  the 
latter,  however,  his  instructions  and  policy  would  be  ac- 
cepted. It  is  therefore  incumbent  upon  him  to  explain  all 
the  increases  in  this  part  of  the  budget. 

The  power  of  the  board  of  estimate  and  apportionment 
is  negative  rather  than  positive,  because  it  can  refuse  the 
requests  for  all  non-mandatory  appropriations  but  cannot 

1  See    a    pamphlet,    Will    Taxes    Increase    in    Greater    New    York, 
published  by  Bureau  of  Municipal  Research,  Dec.  31,  1913,  p.  n. 
-  Henry  Bruere,  Cost  of  Government  in  N.  Y.  C,  p.  10. 


283]  ADMINISTERING  THE  BUDGET  99 

supervise  their  expenditure,  although  it  may  set  up  a 
standard  of  efficiency  according  to  which  they  may  be  spent. 
The  presidents  of  the  five  boroughs  constituting  the  City 
of  New  York  are  responsible  for  only  4.84  per  cent  of  the 
annual  expenditure  for  city  purposes  and  the  comptroller  is 
responsible  for  only  .87  per  cent.  The  latter  is  the  chief 
financial  officer  and  general  auditor  of  the  city,  and  is  in  a 
position  to  prevent  waste,  but  not  to  supervise  expenditure. 
During  the  last  administration  (1910-1914),  the  most  not- 
able instances  of  economy  are  found  in  the  departments 
under  the  control  of  the  borough  presidents.  Although  the 
very  low  level  of  administration  is  partly  accountable  for 
the  economy,  it  must  be  admitted  that  these  departments 
were  committed  to  the  policy  of  saving  money  at  the  very 
outset  of  the  past  administration.  The  ratio  of  increase  in 
the  mayor's  departments  outruns  the  ratio  of  increase  in 
the  offices  of  the  borough  presidents  by  five  times.  The  in- 
creases in  the  foniier  have  been  explained  in  many  ways. 
For  example,  the  redefinition  of  the  work  of  the  bureau  of 
weights  and  measures  and  the  office  of  the  commissioners 
of  accounts  has  caused  an  increase  in  the  appropriations  for 
them.  The  activities  of  the  health  department  have  been 
expanded.  In  part,  the  increases  in  this  and  other  depart- 
ments reflect  the  normal  expansion  of  activities,  notwith- 
standing the  fact  that  they  also  involve  a  percentage  of 
"  slack  "  due  to  the  continuance  of  inefficient  methods  and 
unnecessary  employees.  The  city's  opportunity  for  making 
a  saving  in  expenditures  lies  in  the  original  totality  of  ex- 
penditures, which  serves  as  the  basis  for  yearly  increases 
and  not  merely  in  the  yearly  increases  themselves.  This 
totality  represents  the  cost  of  operating  the  municipal  insti- 
tutions built  up  through  a  process  of  slow  accretion,  and  it 
is  to  this  that  attention  should  be  directed  in  the  effort  to 
make  important  economies  in  city  expenditure. 


lOO  FINANCES  OF  THE  CITY  OF  NEW  YORK  [284 

C.    FUNDING  THE  BUDGET 

I.  Transmission  of  the  Budget  for  Funding. — The  bud- 
get, as  voted  by  the  board  of  estimate  and  apportionment 
and  finally  approved  or  amended  by  the  board  of  aldermen 
and  the  mayor,  is  transmitted  by  the  comptroller  during 
the  month  of  February  to  the  board  of  aldermen.  Accom- 
panying the  budget  are  four  certificates  from  the  comp- 
troller, showing: 

1.  "  The  aggregate  amount  of  the  budget  for  city  pur- 
poses for  the  current  year." 

2.  "  Amount  of  county  charges  and  expenses  for  the  re- 
spective counties  included  in  the  budget  for  the  current 
year." 

3.  "  Amount  of  the  county  charges  and  expenses  for  the 
respective  counties  paid  during  the  preceding  year  from  the 
proceeds  of  special  revenue  bonds." 

4.  "  Estimated  revenues  of  the  general  fund  for  the  re- 
duction of  taxation  during  the  current  year."  ^  This  fund 
is  composed  of  the  follow^ing  items : 

(a)  Balances  carried  over  from  the  preceding  year. 

(b)  Estimated  amounts  of  special  taxes,  such  as  excise 
tax,  mortgage  recording  tax,  bank  tax,  etc. 

(c)  Estimated  amounts  of  revenues  other  than  taxes, 
such  as  commissions  and  fees,  sales  of  surplus  property,  in- 
terest on  delayed  payments  to  the  city,  etc." 

II.  The  Means  of  Funding. — New  York  City  has  to  main- 
tain either  entirely  or  partly  three  different  governments ^ 
vis.,  the  state  government,  the  government  of  the  counties 
comprised  within  the  city  limits  and  the  city  government 

^  See  the  report  of  the  Finance  Committee  of  the  Board  of  Aldermen 
to  the  Board  of  Aldermen,  on  the  1914  budget. 

-  See  a  leaflet,  No  Matter  Who  Is  Elected — No.  7,  why  do  taxes 
increase  in  spite  of  increased  economy  and  efficiency  in  city  depart- 
ments, July  12,  1913. 


I    ■> 


285]  ADMINISTERING  THE  BUDGET  lOi 

proper.  That  part  of  the  budget  which  is  appropriated  to 
the  state  administration  is  always  treated  according  to  the 
usage  prevailing  in  New  York  City  either  (i)  as  an  item  of 
expenditure  for  each  of  the  four  counties,  or  (2)  as  an  item 
of  expenditure  for  the  city  as  a  whole.  Accordingly,  the 
budget  now  consists  of  only  five  divisions,  instead  of  six.^ 
Of  these  five  divisions,  that  for  the  city  proper  is  the  most 
important  by  reason  of  the  fact  that  it  is  by  far  the  largest 
in  amount.  In  191 3,  the  budget  appropriations  for  all 
four  counties  amounted  to  $6,712,297.01,  those  for  the 
state  to  $7,947,031.96,  and  those  for  the  city  proper  to 
$178,529,747.34.=^ 

The  principal  means  of  funding  all  these  budgetary  ap- 
propriations is  by  the  taxation  of  real  estate,  real  estate  of 
corporations,  special  franchises  and  personal  property.  The 
assessment  rolls  of  real  and  personal  estates,  as  prepared  by 
the  department  of  taxes  and  assessment,  are  presented  to 
the  board  of  aldermen  on  March  first  of  each  year,  in  ac- 
cordance with  section  907  of  the  Greater  New  York  Char- 
ter. The  board  of  aldermen  then  proceeds  to  fix  the  tax 
rates,  and  on  or  before  the  twenty-eighth  day  of  March 
transmits  the  rolls  to  the  Receiver  of  Taxes  as  required  by 
section  911  of  the  Charter.  This  allows  him  ample  time  to 
collect  taxes  which  are  now  payable  semi-annually  on  May 
first  and  November  first. 

As  the  subject  of  taxation  will  be  fully  treated  in  the 
second  part  of  this  book,  I  will  not  here  enter  upon  a 
lengthy  discussion  of  it.  It  suffices  to  say  that  the  annual 
tax  levy  generally  falls  short  of  the  total  amount  called  for 
by  the  budget,  due  to  the  use  of  the  general   fund   for 

'  See  a  pamphlet,  Will  Taxes  Increase  in  Greater  New  York,  pub- 
lished by  Bureau  of  Municipal  Research,  December  31,  1913,  p.  11. 

'  Ibid.,  pp.  14-15. 


J02  FINANCES  OF  THE  CITY  OF  NEW  YORK  [286 

the  reduction  of  taxation.  As  the  exact  amount  of  this 
fund  in  the  year  is  unascertainable  at  the  time  the  budget 
is  transmitted  by  the  comptroller  to  the  board  of  aldermen, 
it  is  estimated  mainly  upon  the  basis  of  the  previous  year's 
collection/ 

Owing  to  the  collection  of  taxes  in  New  York  City  late 
in  the  fiscal  year,  it  has  become  a  fixed  habit  with  the  city's 
fiscal  officials  to  have  the  budget  financed  by  borrowing 
money  on  revenue  bonds  and  bills.  The  difficulty  of  financ- 
ing the  tax  levy  budget  and  related  operating  expense  has 
been  largely  relieved  during  the  past  three  years  by  the  new 
plan  of  semi-annual  tax-collection,  devised  by  the  present 
comptroller.  Legislation  authorizing  this  plan  was  ob- 
tained in  191 1  and  went  into  eff'ect  in  the  following  year. 
As  an  illustration  of  its  eff'ect  upon  the  financing  of  the  city's 
current  budget,  it  may  be  stated  that  from  May  first  to  Oc- 
tober first,  1912,  $81,216,235  of  the  taxes  of  that  year  were 
paid  into  the  office  of  the  receiver  of  taxes  on  account  of 
the  levy  of  19 12,  and  during  the  corresponding  portion  of 
the  preceding  year  (191 3),  $79,585,732  were  similarly 
paid." 

Under  the  old  system  of  tax  collections,  no  taxes  could 
have  been  paid  into  the  receiver's  office  until  the  first  Mon- 
day in  October  of  each  year,  as  provided  in  the  Charter. 
The  result  was  that  the  comptroller  was  obliged  to  borrow 
money  in  order  to  finance  the  current  administrative  and 
operating  expenses.  Of  course,  he  makes  borrowings  even 
under  the  new  system,  but  they  are  about  $80,000,000  less 
now  than  they  w^ould  be  if  the  old  system  were  still  in  vogue. 

1  Budget  News  Bulletin,  no.  2,  issued  by  the  Board  of  Estimate,  Oct., 
T913,  pp.  5-6. 

-  Financial  Summary  for  the  year,  Jan.  i,  1913  to  Dec.  31,  1913,  issued 
by  the  Comptroller,  p.  vii. 


287]  ADMINISTERING  THE  BUDGET  103 

The  direct  interest  saving  to  the  city  during  the  year  191 3 
was  fully  $1,260,000  from  this  source  alone.^ 

D.    ADMINISTERING  THE  BUDGET 

The  most  scientific  method  of  budget-making  may  be  of 
no  avail,  unless  the  budget,  after  it  is  finally  determined,  is 
efficiently  administered.  Strict  enforcement  of  the  budget- 
ary provisions  restricting  the  use  of  money  should  be  re- 
quired of  the  city  officials.  No  claims  against  appropria- 
tions should  be  allowed  unless  they  are  properly  chargeable 
against  them.  Liabilities  against  each  and  every  account  in 
the  budget  should  not  be  allowed  to  exceed  the  amount  of 
money  in  it.  The  pro-rata  restriction  as  to  salaries  and 
wages  should  be  carried  out.  As  it  is  not  always  possible 
to  foresee  all  contingencies  which  may  arise  several  months 
hence,  the  original  appropriation  for  a  specific  purpose  may 
subsequently  prove  inadequate.  It  is  therefore  necessary  to 
make  an  adjustment  of  accounts,  with  the  permission,  of 
course,  of  the  appropriating  body.  As  the  last  part  of  this 
book  is  partly  devoted  to  the  discussion  of  administrative! 
control  over  expenditure,  it  is  hardly  necessary  to  discuss 
it  here  in  great  detail.  ItTs  hoped,  however,  that  these  few; 
lines  may  serve  as  a  connecting  link  between  this  and  the 
last  part. 

1  See  the  Financial  Summary  for  19 13,  issued  by  the  Comptroller. 


PART  II 
THE  SYSTEM  OF  TAXATION 


I 


I 

{ 


i 


I 


I 


i 


CHAPTER  IV 

The  Real  Estate  Tax 

The  annual  budget  having  been  made,  the  next  step 
is  to  execute  it  or  to  "  fund  "  it.  The  principal  means 
of  "  funding "  it  is  through  the  taxation  of  real  estate, 
the  real  estate  of  corporations,  special  franchises,  per- 
sonal property  under  the  general  property  tax,  and  some 
special  classes  of  personal  property  under  the  system  of 
special  taxation.  As  the  real  estate  tax  is  the  main  source 
of  revenue  in  New  York  City,  I  deem  it  appropriate  to  de- 
vote one  entire  chapter  to  a  thorough  discussion  of  it,  leav- 
ing the  other  taxes  to  be  treated  in  the  next  chapter. 

A.  separation  of  state  taxation  from  local  taxation 

The  State  of  New  York  levies  most  of  its  taxes  on  cor- 
porations, leaving  real  estate  tO'  the  municipalities  for  local 
taxation.  One  reason  for  this  policy  is  that  the  general 
property  tax  has  broken  down  and  has  been  found  unsuit- 
able to  the  conditions  now  existing.  The  very  fact  that  this 
tax  is  based  on  wealth,  and  not  on  ability,  proves  its  great 
weakness.  Under  this  system,  all  wealth,  regardless  of  the 
income  it  affords,  is  uniformly  taxed.  No  wonder  that  the 
tax  works  injustice  on  many  classes  of  people.  Some  of  the 
principles  underlying  a  good  system  of  taxation  are  uni- 
versality, or  the  diffusion  of  the  tax  equitably  over  all 
classes  of  property;  unifonnity,  or  the  equalization  of 
taxes;  and  proportionality,  or  the  adjustment  of  the  burden 
of  taxation  so  that  it  shall  be  in  proportion  to  the  individ- 
ual's ability.  The  general  property  tax  lacks  universality, 
291]  107 


I08  FINANCES  OF  THE  CITY  OF  NEW  YORK  [292 

because  it  fails  to  reach  personal  property.  It  lacks  uni- 
formity, because  properties  of  equal  values  are  unequally 
assessed,  it  being  easier  to  reach  and  tax  certain  classes  of 
property  than  others.  It  lacks  proportionality,  in  that  the 
burden  falls  more  heavily  upon  those  who  are  less  able  to 
bear  it. 

Under  a  rational  system  of  taxation,  personal  property 
must  be  taxed  separately  from  real  estate.  The  taxation 
of  the  latter  must  be  delegated  to  the  county,  city  or  town 
exclusively,  because  they  are  the  smaller  political  units,  the 
source  from  which  the  land  values  spring.  The  system 
which  allows  local  assessors  to  fix  the  values  and  the  state 
authority  to  tax  them  at  a  uniform  rate  is  bad,  as  it  tempts 
local  assessors  to  underestimate  the  values  of  their  respec- 
tive localities  in  order  that  they  may  be  benefited  at  the  ex- 
pense of  their  neighbors.  The  state  should  be  satisfied  with 
the  personal  property  tax  only,  i.  e.,  a  tax  on  productive  per- 
sonalty. It  is  true  that  it  will  be  very  difficult,  with  the 
present  method  of  taxation,  to  reach  all  of  the  personal 
property.  But  the  experience  of  New  York  State  in  re- 
cent years  has  proven  it  to  be  possible  to  reach  a  large  per- 
centage of  productive  personalty,  if  a  proper  classification 
be  made  of  it  and  a  special  rate,  appropriate  to  each  class, 
be  levied  upon  it.  This  is  greatly  facilitated  by  the  fact 
that  the  bulk  of  this  property  is  now  in  the  hands  of  cor- 
porations incorporated  under  the  state  laws.^ 

As  a  result  of  the  new  policy,  the  total  taxes  now  paid  by 
personal  property  are  much  greater  than  could  have  been 
collected  under  the  old  plan.  A  large  proportion  of  these 
special  taxes  is  spent  for  state  purposes,  and  only  the  bal- 
ance goes  to  the  general  fund  of  the  city.  But  the  city 
receives  a  benefit  from  the  large  percentage  of  special  taxes 

'  Proceedings  of  Conference  h^ld  to  consider  the  Question  of  Tax 
Reformation,  at  Richmond,  Va.,  Jan.  20-21,  1914. 


293]  THE  REAL  ESTATE  TAX  I09 

paid  to  the  state,  as  the  amount  of  direct  state  taxes  dis- 
tributed among  the  counties  is  reduced.  As  New  York  City- 
pays  these  direct  taxes  for  the  counties  included  therein,  its 
burden  is  therefore  lessened.  From  1908  to  191 1,  inclusive, 
there  was  no  general  state  tax,  all  of  the  revenue  required 
being  obtained  through  special  taxes.^ 

B.    RELATIVE  BURDEN  OF  TAXATION  ON  REAL  ESTATE  AND  ON 

PERSONAL  PROPERTY 

From  the  foregoing,  it  is  clear  that  New  York  City  must 
largely  depend  upon  real  estate  for  the  raising  of  money  to 
run  the  government.  As  a  matter  of  fact,  ninety-six  per 
cent  of  the  direct  taxes  are  paid  by  the  owners  of  real  es- 
tate and  only  four  per  cent  by  the  owners  of  taxable  per- 
sonal property  assessed  under  the  general  property  tax. 
Thus,  although  the  city  has  not  succeeded  in  relieving  im- 
provements of  their  heavy  burden  of  taxation  and  adding  it 
to  the  burden  on  the  land,  it  is  certainly  moving  in  the  right 
direction  when  it  imposes  ninety-six  per  cent  of  local  taxa- 
tion upon  real  estate.  This  is  justifiable,  since  the  benefit 
from  the  proper  expenditure  of  municipal  revenue  is  re- 
flected in  the  real  estate  values.  These  expenditures  do 
not  increase  the  value  of  the  buildings  and  improvements 
while  they  add  immensely  to  the  value  of  the  sites  on  which 
the  buildings  stand.  The  only  effect  that  the  expenditure 
of  public  money  has  on  buildings  is  to  cause  a  much  greater 
demand  for  them  and  extensive  building  operations  to 
satisfy  this  demand.  The  site  values  rise  with  each  dollar 
properly  expended  in  city  betterment  and  grow  at  a  steadier 
rate  than  the  expenditure  for  the  betterment.  Thus,  the 
expenditure  of  a  million  dollars  for  highways  may  augment 
the  values  of  sites  by  ten  or  twenty  millions  of  dollars,  by 

'  See  a  pamphlet,  Will  Taxes  Increase  in  Create}-  Nezv  York?  pub- 
lished by  the  Bureau  of  Municipal  Research,  Dec.  31,  1913,  p.  70. 


no  FINANCES  OF  THE  CITY  OF  NEW  YORK  [294 

reason  of  their  becoming  accessible  to  the  business  centre 
or  usable  to  the  community,  while  they  were  formerly  inac- 
cessible and  unusable. 

Imposing  96  per  cent  of  the  city  tax  on  real  estate  is  also 
justifiable  on  the  ground  that  the  value  of  the  land  per 
capita  in  New  York  City,  as  the  record  shows,  is  $915  and 
the  improvement  value  per  capita  only  $533.^  For  a  num- 
ber of  years  these  figures  have  remained  almost  the  same. 
Thus,  as  the  population  has  increased  year  by  year,  the  per 
capita  figures  have  not  materially  varied.  Hence,  it  fol- 
lows that  every  child  born  in  New  York  City  adds  $900  to 
the  value  of  the  land  and  every  person  who  comes  into  the 
city  and  resides  there  contributes  an  equal  amount,  and  that 
to  house  every  baby  or  other  new  resident  causes  an  expen- 
diture of  $500  in  new  buildings.  Furthermore,  the  privi- 
lege of  furnishing  each  baby  with  the  so-called  public  ser- 
vices represented  by  electric  light,  gas  and  telephone  service, 
and  the  transit  facilities,  is  immediately  capitalized  at  $135,^ 
as  evidenced  by  the  records  of  special-franchise  assess- 
ments. 

C.    INCREASE   OF   ANNUAL  TAXES  VCrsUS  INCREASE  OF   REAL 

ESTATE  VALUES 

The  placing  of  the  main  burden  of  taxation  on  real  estate 
can  be  justified  on  another  ground,  i.  c.,  the  increase  of  real 
estate  values  is  far  greater  than  that  of  annual  taxes.  Thus 
in  1899,  the  first  year  of  Greater  New  York,  the  aggregate 
amount  of  taxes  was  $86,183,768,  whereas  in  1908,  it  Vv'as 
$116,542,896.  showing  an  increase  of  35.2  per  cent.  The 
question  is  whether  the  increase  in  real  estate  values  kept 
pace  with  the  increase  in  taxes  or  exceeded  it.  This  may 
be  answered  by  comparing  the  assessed  value  of  real  estate 

^  Pacific  Municipalities  for  1912,  p.  510. 
^  Ibid.,  p.  5 1 1. 


295]  THE  REAL  ESTATE  TAX  HI 

in  1899,  which  was  $2,932,445,464  with  that  in  1908,  which 
was  $6,722,415,789.  The  increase  in  real  estate  values  dur- 
ing the  nine  years  has  therefore  been  129  per  cent,  or  over 
three  and  a  half  times  the  proportionate  increase  in  total 
taxes.  This  comparison  is,  however,  not  quite  accurate,  be- 
cause real  estate  was  assessed  according  to  the  State  Equal- 
ization Board,  at  only  two-thirds  of  its  value  in  1899,  and  at 
actually  90  per  cent  in  1908.  If  the  valuations  of  both  years 
be  brought  to  100  per  cent,  the  figures  would  be  as  follows: 

Real  estate  values  in   1899   $4,398,668,196 

Real  estate  values  in  1908  7,469,350,876 

Increase    3,070,682,680 

or  69.8  per  cent. 

From  the  above,  we  conclude  that  real  estate  values  have 
gone  up  by  69.8  per  cent,  while  the  total  taxes,  by  only  35.2 
per  cent.^  The  burden  of  .taxation  on  real  estate  is  there- 
fore not  so  heavy  as  people  think  it  is. 

D.    THE  DEPARTMENT  OF  TAXES  AND  ASSESSMENTS 

The  Department  of  Taxes  and  Assessments  is  created  by 
the  city's  charter,  and  charged  with  the  duty  of  assessing 
and  appraising  the  value  of  property  in  the  city,  both  real 
and  personal ;  it  does  not,  however,  levy  or  collect  taxes,  for 
they  are  levied  or  collected  by  other  bureaus  or  departments 
of  the  city.  At  the  head  of  the  department  are  seven  com- 
missioners appointed  by  the  Mayor  and  holding  office  dur- 
ing his  pleasure.  Under  them  are  seventy  odd  deputy  com- 
missioners, appointed  by  the  Tax  Board  from  a  list  certi- 
fied to  by  the  Civil  Service  Commission,  the  persons  listed 
being  successful  candidates  for  civil  service  employment  at 

*  New  York  City's  Progress  towards  Civilization — The  Facts  about 
Taxation.  Communication  addressed  by  John  Martin  to  Hon.  Owen 
Cassidy,  Chairman  of  the  Joint  Legislative  Committee  appointed  to 
examine  into  the  Finances  of  New  York  City,  1908,  p.  5. 


112  FINANCES  OF  THE  CITY  OF  NEW  YORK  [296 

a  very  rigid  examination.     To  these  deputy  commissioners 
is  entrusted  the  work  of  assessment  and  appraisal. 

E.    BLOCK  AND  LOT   MAPS 

For  the  purpose  of  assessments  or  appraisals,  as  well  as 
for  the  benefit  of  the  deputy  commissioners,  the  entire  city 
is  divided  into  tax  districts  to  each  of  which  is  assigned  a 
deputy  commissioner.  A  very  large  district,  however,  has 
more  than  one  deputy.  A  survey  is  made  of  the  whole  city 
by  the  surveyors  and  maps  for  each  tax  district  or  section 
are  drawn,  in  order  to  make  sure  that  not  a  single  inch  of 
land  within  the  city  limits  escapes  assessment  or  appraisal. 
Each  district  or  section  is  divided  into  blocks  and  a  block 
may  be  defined  to  be  a  piece  of  land  bounded  on  all  sides  by 
public  roads  or  streets.  Each  block  is  again  subdivided  into 
lots,  all  of  which  are  numerically  indicated.  The  surveyors 
make  a  good  use  of  recorded  deeds  and  other  instruments 
filed  with  the  county  Register,  which  furnish  information 
as  to  the  boundary  lines  of  each  separate  lot  within  a  block, 
thus  enabling  them  to  draw  the  original  maps,  which  are 
later  officially  adopted  by  the  Department  of  Taxes  and  As- 
sessments. In  cases  where  one  lot  is  split  into  two  or  more 
lots,  or  two  or  more  lots  are  consolidated  into  one  lot.  no 
cognizance  will  be  taken  of  such  a  fact,  unless  the  recorded 
deeds  are  produced.^ 

The  block  and  lot  maps  are  a  great  aid  to  the  deputies 
for  the  following  reasons.  In  the  first  place,  when  a  com- 
munity changes  from  a  rural  town  to  a  commercial  city,  it 
ceases  to  deal  with  large  farms  and  large  areas,  but  begins 
to  deal  with  small  compact  city  lots.  A  very  small  city  lot 
may  be  equal  in  value  to  a  very  large  farm.  Every  foot 
and  every  inch,  which  may  be  entirely  neglected  in  judging 

^  The  Single  Tax  Revieiv,  special  number,  vol.  13,  no.  I,  Jan.- Feb., 
1913,  pp.  63-64. 


297]  ^^^  REAL  ESTATE  TAX  II3 

the  value  of  a  farm,  becomes  of  great  value  when  added  to 
a  city  lot.  For  this  reason,  the  city  needs  an  official  map, 
accurately  planned  and  made  out,  showing  the  exact  bound- 
aries of  each  city  lot.  The  making  of  such  a  map  will  un- 
earth the  false  representations  of  facts  as  to  the  size  of  the 
lots  and  the  concealment  of  entire  lots  from  assessment  and 
taxation.  The  rightful  taxes  which  have  been  lost  to  the 
city  when  there  have  been  no  maps  available  for  use,  will 
more  than  pay  the  cost  of  making  them. 

In  the  second  place,  these  maps  serve  the  purpose  of  re- 
ducing the  trouble  and  cost  of  describing  the  property  in 
sufficient  detail  to  identify  it.  In  many  cases  the  assess- 
ments were  declared  illegal  by  the  courts  on  account  of  the 
insufficient  description  on  the  assessment  roll.  In  the  opin- 
ion of  the  court,  a  man  is  entitled  to  know,  when  he  inspects 
the  assessment  roll,  what  property  is  assessed,  and,  when 
the  property  is  sold  for  taxes,  the  purchaser  is  entitled  to 
know  what  property  is  being  sold.  This  is  the  important 
thing  in  the  assessment  of  real  estate  to-day.  The  assessors 
must  insert  in  the  roll  such  a  description  of  the  property  as 
is  sufficient  to  identify  it.  The  failure  to  do  so  makes  the 
assessment  illegal.  All  these  difficulties  and  risks  are  gone 
the  moment  that  an  accurate  block  and  lot  map  is  prepared. 
The  assessor  simply  refers  to  the  plot  and  the  lot  or  other 
description  of  the  property  assessed  and  gets  rid  of  all  the 
questions  of  description  of  property.  Further  the  require- 
ment that  property  shall  be  described  in  sufficient  detail  im- 
poses on  the  city  large  expenditure,  since  sometimes  such  a 
description  takes  a  page  and  a  half  of  an  ordinary  assess- 
ment roll.  The  adoption  of  a  tax  map  does  away  with  this 
expenditure.  If  the  assessor  can  draw  a  short  description, 
having  it  bounded  north  by  Brown's,  east  by  Jones',  south 
by  Main  Street,  and  west  by  some  other  street,  it  is  cer- 
tainly a  much  shorter  way  than  to  write  out  a  long  descrip- 
tion of  every  parcel  in  the  tax  district. 


114  FINANCES  OF  THE  CITY  OF  NEW  YORK  [298 

F.    LAND  VALUE  MAPS 

In  addition  to  the  block  and  lot  maps,  there  are  now  in 
use  about  one  hundred  and  forty  land  value  maps  for  the 
entire  City  of  New  York.  Under  an  agreement  with  the 
Department  of  Taxes  and  Assessments,  they  are  published 
by  the  Record  and  Guide.  They  are  so  drawn  with  the 
streets  as  to  allow  the  recording  of  per  front  foot  value  of 
a  normal  lot  one  hundred  feet  deep  which  is  not  subject  to 
corner  influences.  In  the  case  of  large  tracts  of  land  in  the 
suburban  districts,  the  value  per  acre  is  marked  in  dollars. 
Where  the  parcel  in  the  city  is  irregular  in  shape  or  subject 
to  corner  influences,  the  actual  value  is  derived  from  the 
value  per  front  foot,  one  hundred  feet  deep,  of  an  inside 
lot,  after  due  allowance  is  given  to  shape  and  position. 
"  The  frontage  value  recorded  is  the  value  per  front  foot 
of  a  vacant  inside  lot,  one  hundred  feet  deep,  lying  normally 
W'ith  reference  to  the  grade  of  the  street  and  being  of 
normal  or  common  size  and  shape."  When  a  change  in 
frontage  value  is  found  in  any  given  block,  the  fact  is  in- 
dicated by  recording  the  figures  at  two  or  more  places  along 
the  block.  ^ 

For  191 3  the  land  value  maps  were  first  made  public  at 
the  same  time  that  the  assessment  rolls  were  opened  to 
public  inspection.  That  is  to  say,  they  were  published  on 
the  day  when  the  assessment  rolls  were  opened  for  inspec- 
tion, when  the  taxpayers  could  come  into  the  assessing  de- 
partment to  complain  of  the  over-assessment  placed  upon 
their  property.  These  maps  have  been  a  help  to  the  depart- 
ment, because  they  tend  to  reduce  the  groundless  complaints. 
In  the  City  of  New  York  there  is  a  class  of  men  who  make 
it  a  profession  to  solicit  reductions  in  assessments  in  the 

*  See  a  pamphlet,  Factors  of  Value  of  New  Buildings  and  Explana- 
tion of  Land  Value  Maps,  published  by  the  Department  of  Taxes  and 
Assessments  of  the  City  of  New  York,  1912,  pp.  I3-I4- 


299]  THE  REAL  ESTATE  TAX  n^ 

interests  of  their  clients.  They  have  become  very  expert. 
Before  they  request  reductions  they  study  the  land  value 
maps  throughout  all  the  sections  where  high  values  pre- 
vail with  a  view  to  discovering  discriminations.  If  they 
find  that  any  one  of  their  clients  has  been  discriminated 
against  or  some  other  property  owners  in  the  neighborhood, 
whom  they  do  not  represent,  have  been  better  treated,  they 
have  ground  for  demanding  a  reduction.  Now  the  publi- 
cation of  these  land  value  maps  has  been  very  helpful  to  the 
assessing  department,  as  it  has  made  very  rare  the  cases  in 
which  criticism  of  the  assessments  made  by  the  department 
is  justified.  Further,  it  has  been  helpful  to  the  assessors, 
because  they  feel  that  their  work  is  going  to  be  scrutinized 
by  real-estate  experts.  This  feeling  is  sufficient  to  make 
them  careful  about  their  work.^ 

Thus,  these  maps  are  useful  not  only  because  the  values 
of  adjoining  parcels  of  property  on  one  street,  when  shown 
on  them,  will  bear  a  reasonable  relation  to  each  other,  but 
also  because  they  assist  the  department  to  consider  the  ap- 
plication for  reassessment,  making  reductions  when  nec- 
essary and  satisfying  complaints  when  assessments  are  in- 
equitable. In  a  word,  they  are  availed  of  in  bringing  about 
a  more  uniform  assessment  of  land  values. 

G.    SEPARATE   ASSESSMENTS   OF   LAND   AND   BUILDINGS 

Prior  to  1903  in  the  City  of  New  York,  only  a  lump  sum, 
either  for  both  land  and  building,  or  for  a  vacant  lot,  was 
shown  on  the  assessment  rolls.  The  reports  which  were 
made  at  that  time  by  the  tax  department  showed  the  total 
of  the  aggregate  assessed  valuation  of  each  section.  The 
assessors  were  then  in  the  habit  of  regarding  every  tax- 
payer who  asked  a  question  as 'too  dangerous  an  enemy  to 

*  City  Club  Bulletin,  vol.  vi,  no.  14,  March  4,  1913,  issued  by  the  City 
Club  of  Philadelphia,  p.  336. 


Il6  FINANCES  OF  THE  CITY  OF  NEW  YORK  [300 

be  told  any  more  than  was  necessary  in  each  case.  This 
was  the  cause  of  a  great  deal  of  criticism  against  the  assess- 
ing department,  even  though  much  of  it  was  unjust. 

The  assessing  department  has  learned  a  valuable  lesson 
from  its  long  experience,  and  has  come  to  believe  that  the 
system  that  would  protect  it  from  unfair  criticism  and  at 
the  same  time  give  it  the  greatest  help  is  one  which  would 
give  every  one  interested  the  best  possible  opportunity  for 
criticising  every  detail.  This  necessitated  the  exhibition  of 
its  work  in  as  great  detail  as  possible,  and  in  order  to  attain 
this  end,  the  charter  of  the  city  w^as  so  amended  in  1903  as 
to  require  the  assessment  of  land  separately  from  the  build- 
ings and  improvements.  This  amendment  was  later  adopted 
for  all  cities  in  the  State  of  New  York. 

The  first  reason  for  assessing  the  value  of  the  land  and 
buildings  thereon  separately  is  to  make  correct  valuations. 
The  old  practice  of  assessing  the  building  and  lot  together 
made  correct  valuations  impossible.  A  first-class  lot  on  a 
good  business  street  containing  a  private  residence,  with 
an  old  or  obsolete  building  of  little  value,  might  be  assessed 
at  a  smaller  value  than  an  adjacent  lot  of  the  same  size, 
with,  however,  a  fine  building  thereon.  This  shows  that 
the  old  building  has  such  a  bad  effect  upon  the  mental 
operations  of  the  assessors  that  the  value  of  the  lot  is  un- 
derestimated.^ 

The  second  reason  for  assessing  the  building  and  the  lot 
separately  is  to  let  every  man  know  what  his  house,  store, 
or  building  of  any  kind,  is  worth  and  what  his  lot  and  land, 
as  distinguished  from  the  improvements  thereon,  are  worth. 

It  is  obvious  that  if  the  value  of  the  land  should  be 
separately  ascertained,  without  any  regard  for  the  buildings 

^  See  address  on  The  Assessment  of  Real  Estate,  by  Lawson  Purdy, 
President  of  the  Tax  Department,  delivered  at  the  dinner  of  the 
Board  of  Real  Estate  Brokers,  New  York,  March  7,  1903. 


201  ]  THE  REAL  ESTATE  TAX  ny 

and  improvements,  the  deputy  tax  commissioners  will  find 
it  very  difficult  to  discriminate  between  the  various  assess- 
ments of  land  values.  They  will  be  required  to  take  greater 
care;  the  mere  mechanical  copying  of  figures  by  clerks  from 
the  old  assessment  rolls  will  be  impossible ;  and  it  will  be  an 
easy  matter  for  taxpayers  to  make  comparisons  of  their 
own  assessments  with  those  of  their  neighbors.  It  will 
also  be  an  easy  matter  to  produce  better  evidence  in  the  case 
of  litigation  to  support  the  assessment  if  the  valuation  is 
correct,  or  to  substantiate  the  claim  of  the  taxpayer  if  the 
valuation  is  incorrect.^ 

H.    METHODS  OF  ARRIVING  AT  LAND  VALUES 

In  addition  to  the  two  kinds  of  maps  used  by  the  deputies 
or  assessors  in  determining  the  value  of  property,  they  are 
also  assisted  in  their  work  by  the  department  of  taxes  and 
assessments  which  furnishes  them  with  all  information 
about  sales  where  the  consideration  is  stated  in  the  deeds, 
including  the  auction  sales.  These  sales  are  placed  on  rec- 
ord in  the  form  of  cards  which  are  used  for  reference  by 
the  deputies.  In  the  Boroughs  of  Manhattan  and  the 
Bronx,  the  deputies  carry  with  them  a  copy  of  The  Record 
and  Guide,  containing  all  sales,  mortgages  and  recorded 
leases.  In  the  other  boroughs,  the  department  examiners 
abstract  from  the  records  of  the  register  or  the  county 
clerk  the  data  concerning  conveyances,  mortgages  and  re- 
corded leases.  These  deputies  are  furnished  with  these 
records  in  the  most  convenient  form.  In  order  to  throw 
as  much  light  as  possible  on  the  true  value  of  the  property, 
the  deputies  are  expected  to  seek  other  information  from 
the  real-estate  brokers  and  others,  in  respect  to  sales,  leases 
and  rentals.  In  general,  they  have  met  with  much  success 
in  their  search  for  data,  which  they  record  in  their  field 

1  Purdy,  op.  cit. 


Il8  FINANCES  OF  THE  CITY  OF  NEW  YORK  [302 

books.  The  data  consist  of  the  actual  prices  paid  for  land 
which  are  not  supposed  to  be  known  to  any  one  except  the 
two  parties  to  the  transaction.  Although  the  asking  prices 
generally  cannot  be  taken  as  a  measure  of  true  value,  they 
are  evidences  of  value  none  the  less  and  are  therefore  re- 
corded on  the  deputies'  field  books.  From  this  assemblage 
of  evidences  of  value,  they  determine  the  value  per  front 
foot  in  each  district.  The  exhibition  of  values  on  a  land 
value  map  is  designed  to  adjust  the  discrepancies  and  to 
correct  the  errors  which  might  otherwise  be  made  in  the 
valuation  of  particular  streets.  It  is  because,  upon  the  ex- 
hibition of  the  values  of  adjoining  parcels  on  a  map,  they 
will  be  found  to  bear  a  reasonable  relation  to  each  other.  ^ 
Dishonest  discrimination  and  unintentional  errors  will  be 
disclosed. 

These  records  of  sales,  mortgages,  leases,  conveyances, 
rentals,  etc.,  are  made  use  of  in  the  following  way.  In  ar- 
riving at  the  value  of  the  land  without  considering  the 
buildings  thereon,  the  deputies  may  make  use  of  the  value 
of  one  or  more  unimproved  parcels  of  land  in  the  imme- 
diate neighborhood,  for  their  value  can  be  readily  ascer- 
tained by  methods  well  understood  by  most  assessors.  As 
the  values  of  adjoining  parcels  of  land  bear  a  close  relation 
to  each  other,  such  data  are  a  valuable  aid  to  the  deputies 
in  ascertaining  the  value  of  the  improved  parcels  of  land. 
In  case  they  fail  to  find  vacant  lots  in  the  neighborhood, 
they  can  resort  to  the  record  of  sales  of  lots  situated  nearby 
and  thereafter  improved  at  a  cost  more  or  less  accurately 
ascertainable.  Again,  in  every  built-up  neighborhood  there 
can  be  found  a  fairly  large  number  of  buildings  constructed 
at  a  cost  more  or  less  accurately  ascertainable.  Due  allow- 
ance is  given  for  depreciation  from  wear  and  tear  and  obso- 

^  See  Factors  of  New  Building,  etc.,  op.  cit.,  pp.  15-16. 


303]  THE  REAL  ESTATE  TAX  Hq 

lescence  if  any.  By  subtracting  the  value  of  buildings  so 
ascertained  from  the  total  assessed  valuations  on  the  basis 
of  recent  sales,  mortgages,  rentals,  leases,  etc.,  the  land 
values  can  be  determined  with  a  great  degree  of  accuracy.* 
These  methods  are  not  the  only  methods  of  determining 
the  land  values,  but  they  are  fairly  illustrative.^ 

I.    HIDING    THE   TRUE    CONSIDERATION    IN    DEEDS 

Unfortunately  the  fact  that  the  true  consideration  in 
deeds  is  hidden  has  caused  the  Department  of  Taxes  to  lose 
the  best  evidence  of  land  value  and  consequently  to  waste 
much  valuable  time  in  a  hunt  for  what  ought  to  l>e  a  matter 
of  record.  There  is  a  consensus  of  opinion  among  the  as- 
sessors that  the  true  value  of  property  is  concealed  by  the 
recital  of  "  one  dollar  and  other  good  consideration  "  in 
nearly  all  deeds.  Most  of  the  assessors  report  that  not  more 
than  one  or  two  per  cent  of  the  recorded  deeds  show  the 
true  value  of  the  property.  Some  raise  the  percentage  to 
ten.  It  is  therefore  evident  that  the  consideration  given  for 
the  property  in  deeds  cannot  be  taken  as  an  evidence  of  true 
value ;  and  should  be  withheld  from  the  assessors. 

It  is  rather  unfortunate  that  the  true  price  of  real  prop- 
erty for  the  purpose  of  taxation  is  the  most  inaccessible 
price  to  obtain,  although  it  is  the  most  important  price  to 
know,  from  the  standpoint  of  the  taxing  officials.  On  the 
stock  exchange,  quotations  are  daily  given  for  stocks  and 
bonds ;  on  the  produce  exchange,  all  kinds  of  produce  are 
daily  quoted :  and  on  the  metal  exchange,  we  learn  the 
prices  of  metals.  In  fact,  actual  prices  of  every  conceivable 
kind  of  goods  can  be  secured  upon  inquiry  at  any  retail 
store.  The  only  price  that  is  to-day  so  clouded  that  it  is 
practically  invisible  and  unascertainable  is  the  price  paid 

'  See  a  pamphlet.  Real  Estate  and  its  Taxation  in  Philadelphia,  pub- 
lished by  the  Mayor  of  the  City  of  Philadelphia,  1913,  pp.  19-20. 


I20  FINANCES  OF  THE  CITY  OF  NEW  YORK  [304 

for  real  estate/  If  it  could  be  stated  in  the  deeds,  it  would 
prove  a  great  benefit  to  the  deputies  as  well  as  to  the  tax- 
payers, because  when  the  deputies  have  learned  the  true 
value  of  property,  their  attention  would  certainly  be  called 
to  those  figures  which  stand  out  either  too  high  or  too  low 
and  would  therefore  be  discredited  as  evidences  of  value. 
Further,  if  the  true  consideration  appeared  in  clear,  unmis- 
takable terms  in  the  deeds,  all  the  loud  outcry  against  un- 
equal assessment  would  gradually  diminish,  for  it  would 
then  be  easy  to  assess  property  at  its  full  value.  Hereto- 
fore, a  movement  to  place  the  most  effective  tools  at  the  dis- 
posal of  the  assessors  has  been  resisted  by  the  real-estate 
speculators,  who  are  afraid  lest  it  might  be  difficult  to  sell 
the  real  property  at  fancy  prices,  i.  e.,  at  prices  greater  than 
its  original  cost.  It  would  be  difficult,  they  think,  to  sell 
the  property  to  the  buyers  when  they  learn  that  the  cost  of 
the  property  is  much  lower  than  the  price  the}'-  are  asked  to 
pay  for  it.  Hence  the  contention  of  the  real  estate  interests 
that  to  require  by  law  a  statement  of  the  true  consideration 
in  deeds  will  prove  injurious  to  the  normal  and  legitimate 
trading  in  real  estate.  It  has  been  demonstrated  by  ex- 
perience, however,  that  the  disclosure  of  the  true  considera- 
tion in  the  deeds  will  conduce  to  the  increase  and  prosperity 
of  real  estate  business.  Men  engaged  in  legitimate  busi- 
ness endorse  the  measure,  because  they  have  been  brought 
to  the  belief  that  the  giving  of  the  true  consideration  in 
deeds  will  tend  to  give  confidence  to  people  who  hesitate  to 
buy  real  property  because  of  their  mistrust.  If  every  deed 
contained  a  true  statement  of  facts,  and  if  the  department 
of  taxes  and  assessment  used  it  as  a  source  of  reliable  in- 
formation concerning  the  value  of  the  property,  the  result 

^  Report  of  the  Commissioners  of  Taxes  and  Assessments  of  the  City 
of  New  York,  1913,  p.  8. 


205]  THE  REAL  ESTATE  TAX  12i 

would  unquestionably  be  the  conversion  of  many  men  into 
buyers  and  owners  of  real  estate.  The  buyers  will  natur- 
ally turn  to  the  assessment  roll,  as  embodying  and  furnish- 
ing an  exact  criterion  of  value. 

There  is  a  possible  objection  to  the  measure  in  that  the 
affidavits  of  value  may  be  false.  This  is  a  reasonable  ob- 
jection, but  as  President  Purdy  of  the  New  York  Tax  De- 
partment says,  at  least  70  per  cent  of  the  affidavits  will  be 
truthful.  The  remaining  30  per  cent  might  be  discarded. 
It  is  true  that  a  large  proportion  of  the  truthful  affidavits 
in  combination  with  30  per  cent  of  the  untruthful  ones  will 
be  very  misleading  to  the  assessors  or  deputies,  but  at  any 
rate,  they  will  not  be  as  misleading  as  they  are  now. 

Another  objection  has  been  raised  that  men  sometimes 
purchase  property  at  a  higher  price  than  it  is  really  worth, 
in  order  that  they  may  round  out  the  parcel  for  a  business 
block  or  some  other  purpose.  This  must  be  accepted  as 
containing  some  truth,  but  we  must  remember  that  no  as- 
sessor will  fail  to  observe  the  sudden  jump  in  a  real  estate 
value  when  all  other  values  remain  normal.  Therefore  a 
sudden  jump  of  value  in  a  particular  transfer  will  not  in- 
fluence them  unduly. 

The  reader  must  not  think  that  the  selling  price  is  always 
relied  upon  by  deputies  as  the  true  indication  of  the  value 
of  any  piece  of  land.  A  single  sale  is  only  a  register  of  the 
opinions  of  two  parties  to  the  sale,  the  buyer  and  the  seller. 
More  than  this,  it  frequently  happens  that  necessity  may 
compel  the  sale  of  property  for  much  less  than  the  property 
was  really  worth.  Hence  selling  prices  cannot  be  relied 
upon  as  a  just  figure  at  which  to  assess  a  particular  prop- 
erty, but  can  be  counted  upon  as  one  of  the  various  indica- 
tions to  be  considered  in  the  determination  of  values.^ 

'  Proceedings  of  the  International  Tax  Association,  1910,  pp.  383-386. 


122  FINANCES  OF  THE  CITY  OF  NEW  YORK  [306 

J.    THE  VALUATION  OF  BUILDINGS 

When  a  building  is  suitable  for  the  site  and  does  not  suf- 
fer depreciation  from  wear  and  tear,  its  value  is  determined 
by  finding  the  cost  of  reproduction.  It  can  never  be  more.  If 
it  is  unsuitable  to  the  site  or  depreciated  by  age,  the  amount 
of  depreciation  can  be  ascertained  by  taking  account  of  the 
rental  and  by  using  the  tables  prepared  by  architects,  engi- 
neers and  accountants,  giving  the  average  rate  of  depre- 
ciation of  various  classes  of  buildings.^ 

In  every  large  city  there  may  be  found  thousands  of 
buildings  which  do  not  add  any  value  to  the  lot  on  which 
they  stand.  That  is  to  say,  they  are  either  unsuitable  for 
the  site  or  are  so  depreciated  that  it  does  not  pay  to  keep 
them  in  repair.  In  the  City  of  New  York,  however,  a 
small  value  is  attached  to  them,  on  the  theory  that  when 
the  lot  is  purchased  for  improvement,  the  preparation  of 
plans  for  putting  up  a  new  and  suitable  building  will  re- 
quire some  months,  during  which  time  the  old  buildings 
yield  a  revenue.  Whatever  the  revenue  may  be,  about  one 
year's  rental  is  taken  as  a  minimum,  which  indicates  that 
there  is  a  building  there.  This  is  in  conformity  with  a  rule 
which  has  found  some  favor  in  New  York  City :  "  That  a 
plot  of  land  and  the  building  on  it  that  is  used  as  a  revenue- 
producing  property  is  worth  the  net  rental  capitalized  at  a 
suitable  rate  per  cent,  and  that  this  is  the  best  test  of  the 
value  of  the  whole;  and  that  the  whole  is  never  worth  more 
than  the  net  rental  capitalized  at  a  suitable  rate  per  cent 
until  the  land  alone  exceeds  in  value  this  capitalized  sum."  " 
Mr.  Lawson  Purdy.  President  of  the  Tax  Department,  gave 
as  a  concrete  illustration  of  this  rule  an  apartment  house 

^  Report  of  Commissioners  of  Taxes  and  Assessments  of  the  City  of 
New  York,  1913,  p.  122. 

*  See  an  article  by  Lawson  Purd}'  in  City  C'ub  Bulletin,  issued  by  the 
City  Club  of  Philadelphia,  vol.  vi,  no.  14,  March  4,  1913,  p.  334. 


307]  THE  REAL  ESTATE  TAX  ^23 

in  New  York  City  built  about  thirty  years  ag'o.  The  gross 
rent  obtained  at  the  beginning  was  about  forty  thousand 
dollars  ($40,000).  The  entire  property — land  and  build- 
ing together — was  valued  at  about  four  hundred  thou- 
sand dollars.  To-day,  the  gross  rent  is  only  $39,000. 
Within  the  past  thirty  years,  many  changes  have  taken 
place.  Business  has  been  coming  in  around  that  old  apart- 
ment house,  with  the  result  that  the  value  of  the  land  has 
jumped  up  from  $150,000  thirty  years  ago  to  $320,000  at 
present,  although  the  value  of  the  entire  property  stands 
to-day  at  the  same  figure.  This  indicates  that  the  land  has 
kept  on  climbing  until  in  a  few  years  it  may  come  to  be 
equal  in  value  to  the  original  worth  of  the  whole  property, 
and  that  the  building  has  been  depreciating.  To-day  the 
market  value  of  the  building  is  no  more  than  $80,000.  The 
whole  property  to-day  is  worth  the  net  rental  capitalized  at 
a  suitable  rate  per  cent,  in  the  same  way  as  thirty  years 
ago.  This  sufficiently  illustrates  the  steady  increase  in  the 
value  of  land  and  the  corresponding  decrease  in  the  value 
of  improvements.  Corroboration  of  this  statement  is 
found  in  one  of  the  addresses  of  Professor  MacCracken 
W'ho  says  ^  that  a  study  of  the  assessment  roll  of  the  var- 
ious blocks  in  the  city  indicates  that,  especially  in  the  case  of 
old  buildings,  the  valuation  of  the  improvements  falls  much 
further  short  of  the  cost  value  or  replacement  value  than 
the  value  of  land  falls  short  of  the  market  price.  This  is 
illustrated  by  taking  up  at  random  several  cases  of  assess- 
ments of  land  and  buildings  from  the  assessment  roll.  Thus 
in  one  case,  "  a  row  of  millionaires'  residences  on  a  fash- 
ionable street  are  valued  at  $12,000  to  $15,000  each,  al- 
though they  stand  on  land  valued  at  $90,000  to  $105,000 

*  See  his  address  on  Real  Estate  Taxation  in  Xeiv  York  City,  at  the 
First  National  Conference  on  State  and  Local  Taxation  in  1907. 


124  FINANCES  OF  THE  CITY  OF  NEW  YORK  [308 

and  although  the  houses  are  recognized  as  suitable  improve- 
ments for  the  site,  though  not  of  recent  construction.  On 
another  fashionable  street,  the  improvement  valuations  run 
from  $25,000  to  $35,000,  whereas  the  land  is  valued  at 
$120,000  to  $150,000.''  Cases  where  the  improvements  are 
valued  at  $80,000  erected  on  land  valued  at  $65,000,  are 
very  fev/  in  number.  In  these  cases,  the  houses  are  gener- 
ally built  within  the  last  two  or  three  years  on  parcels  lying 
outside  of  the  fashionable  sections.  In  general,  it  is  safe 
to  assert  that  the  assessed  improvement  value  bears  little 
relation  to  the  cost  of  the  original  improvement  or  the  cost 
of  replacements,  and  that  the  value  due  to  the  desirable  im- 
provements in  fashionable  localities  is  absorbed  by  the  land 
value,  the  improvement  value  tending  to  decrease  in  propor- 
tion as  the  land  values  tend  to  increase.  These  conditions 
are,  however,  desirable  to  the  majority  of  the  population  in 
New  York  City,  for  the  reason  that  modern  improvements 
and  equipment  would  not  have  a  chance  to  find  favor  with 
the  city  population  except  under  very  favorable  tax  condi- 
tions. 

Two  other  interesting  features  of  improvement  assess- 
ment in  New  York  City  should  be  noted  before  we  pass 
over  to  another  topic.  ( i )  The  new  improvements  are  as- 
sessed at  a  higher  ratio  of  their  value  than  the  old  improve- 
ments, no  matter  whether  the  value  is  determined  by  cost 
or  by  earning  power.  This  practice  is  undoubtedly  due  to 
the  prevalent  belief  in  New  York  City  that  the  edifices 
should  be  regarded  as  temporary  improvements,  in  face  of 
the  fact  that  in  other  cities  they  would  be  regarded  as  good 
for  a  hundred  years.  Hence  the  old  improvements  were 
valued  at  one-fourth  or  one-third  of  their  cost  and  the  new 
improvements  at  80  or  90  per  cent.  (2)  Some  private  resi- 
dences in  New  York  City  were  assessed  for  less  than  the 
cost  of  their  interior  decorations.     This  is  because  of  the 


oog]  THE  REAL  ESTATE  TAX  125 

tremendous  ease  of  ascertaining  the  cost  of  the  unfinished 
buildings  as  evidenced  by  the  estimates  filed  with  the  build- 
ing department  and  the  tremendous  difficulty  of  arriving  at 
the  cost  of  interior  fittings  and  decorations.  The  result  is 
that  tenement  houses  were  loaded  with  a  relatively  higher 
burden  than  private  residences,  the  former  being  marked 
off  from  the  latter  by  the  absolute  lack  of  interior  finish  and 
ornamentations. 

K.    BUILDINGS  UNDER  CONSTRUCTION   NOT  TAXED 

In  191 3  an  amendment  was  added  to  the  New  York  City 
charter  providing  that  "  a  building  in  course  of  construc- 
tion, commenced  since  the  preceding  first  day  of  October 
and  not  ready  for  occupancy,  shall  not  be  assessed."  ^  Here- 
tofore, unfinished  buildings  were  assessed  on  the  assess- 
ment day,  which  is  fixed  by  law  at  October  first,  at  an  esti- 
mated value.  As  the  buildings  were  in  an  incomplete  stage, 
it  was  a  very  difficult  matter  for  the  assessors  to  make  a 
fairly  correct  estimate.  It  became  necessary,  therefore,  to 
make  an  arbitrary  valuation.  The  amendment  not  only 
does  away  with  the  difficulty  of  making  a  proper  valuation, 
but  also  encourages  the  erection  of  new  buildings  especially 
where  they  are  to  supplant  old  buildings  producing  a  reve- 
nue. In  New  York  City  where  values  are  so  high  as  to 
yield  a  good  rental,  owners  of  old  buildings  will  naturally 
hesitate  to  replace  old  buildings  with  new  ones  because  of 
the  loss  of  rental,  and  the  heavy  burden  of  taxation  during 
reconstruction.  The  change  in  the  law  should  lessen  this 
hesitation.  Hereafter,  unfinished  buildings  will  be  exempt 
from  taxation  for  one  year,  which  is  in  most  cases  the  per- 
iod of  non-revenue  production.  The  land,  however,  is 
taxed  as  usual." 

1  New  Section  889-a,  by  Ch.  324. 

*  See  the  summary  of  Tax  Legislation  and  State  Finances,  issued  by 
New  York  Tax  Reform  Association,  No.  543,  June  10,  1913. 


126  FINANCES  OF  THE  CITY  OF  NEW  YORK  [310 

L.    THE   TWO-COLUMN    STATEMENT   veVSUS  THE   THREE- 
COLUMN  STATEMENT 

Under  the  laws  of  Massachusetts,  New  Jersey,  and  a 
number  of  other  states,  the  value  of  the  land  is  required  to 
be  stated  in  one  column,  that  of  the  buildings  and  im- 
provements in  another  and  the  total  value  in  a  third.  In 
New  York  City,  only  two  columns  are  used,^  one  for  the 
value  of  land  and  the  other  for  the  total  value  of  land  and 
buildings.  The  value  of  buildings  is  ascertained  by  sub- 
tracting from  the  total  value  the  value  of  the  land.  The 
New  York  method  is  said  to  be  preferable  to  the  other 
method  because  there  is  a  positive  objection  to  the  latter 
under  which  the  value  of  the  buildings  is  required  to  be 
stated  in  a  separate  column.  The  objectionable  feature  is 
that  the  assessors  are  "  confronted  with  the  necessity  of 
actually  setting  down  the  value  of  improvements  which  are 
valueless  or  by  making  a  direct  statement  that  they  are  val- 
ueless." 

In  arriving  at  the  values  of  improved  property,  the  depu- 
ties should  have  their  attention  concentrated  first  upon  the 
principal  element  of  value — the  land,  and  then  upon  the 
total  value  of  the  entire  property,  including  land  and  im- 
provements, not  upon  the  building  itself.  If  a  separate 
column  is  provided  for  the  value  of  the  building,  the  as- 
sessor's mind  is  naturally  concentrated  upon  the  one  ele- 
ment, and  the  psychological  consequence  will  be  a  tendency 
on  the  part  of  the  assessor  to  place  a  value  on  a  buildings 
which  is  valueless,  or  deal  with  a  depreciated  building  as  if 
there  were  no  depreciation.  This  objection  can  be  obviated 
by  adopting  the  two-column  method,  which  makes  the  as- 
sessor answer  two  questions — What  is  the  land  worth  ?  and 
what  is  the  land  plus  the  building  worth  ?  - 

'  See  the  address  on  the  Assessment  of  Real  Estate  by  Lawson  Purdy. 
*  See  a  pamphlet,  Real  Estate  and  Its  Taxation  in  Philadelphia,  pub- 
lished by  the  Mayor  of  the  City  of  Philadelphia,  1913,  P-  IQ- 


31 1  ]  THE  REAL  ESTATE  TAX  1 27 

Buildings  and  improvements  are  valuable  only  when  they 
are  suitable  to  the  location  and  fit  for  the  best  use  of  the 
land  on  which  they  stand.  A  large  sum  of  money  may  be 
expended  on  them  without  enhancing  the  selling  price  of 
the  lot  or  parcel.  The  correct  method  of  determining  the 
market  value  of  the  building  and  improvements  is  as  pro- 
vided by  the  two-column  system  to  determine  the  market 
value  of  the  lot  or  parcel  with  the  buildings  and  improve- 
ments standing  on  it  and  then  to  determine  the  market  value 
of  the  land  alone  without  giving  any  consideration  to  the 
buildings  and  improvements.  The  difference  between  the 
two  represents  the  value  of  the  buildings  and  improvements. 
It  would  work  a  great  injustice  if  the  value  of  the  build- 
ings and  improvements  were  determined  separately  from 
that  of  the  land.  The  total  valuation  might  be  so  increased 
as  to  generally  exceed  the  real  value  of  the  property  as  a 
whole,  as  a  result  of  giving  too  much  valuation  to  the  build- 
ings and  improvements.  If  the  total  value  of  the  prop- 
erty as  a  whole  is  not  increased,  the  value  of  the  land  might 
be  unduly  decreased,  because  the  buildings  might  be  over- 
valued. The  over-valuation  of  the  building  and  improve- 
ments is  likely  to  occur  if  they  are  valued  separately,  since 
the  assessors'  attention  might  be  attracted  to  their  cost,  not 
to  their  present  market  value.  It  is  an  established  fact  that 
the  cost  of  buildings  bears  no  relation  whatever  to  their 
present  selling  value.  They  are  subject  to  the  double  depre- 
ciation— from  wear  and  tear  on  the  one  hand  and  from  ob- 
solescence on  the  other. 

M.    ASSESSMENT  AT  FULL  VALUE 

In  order  to  make  the  assessment  better  from  year  to  year, 
it  is  important  to  see  that  all  lots  in  the  city  should  be  as- 
sessed at  some  ideal  standard.  That  standard  is  "  full 
value  ",  as  found  in  law,  or  "  market  value  "  as  interpreted 


128  FINANCES  OF  THE  CITY  OF  NEW  YORK  [312 

by  the  courts.  This  is  the  wisest  standard  that  has  ever  been 
found  in  the  United  States.  If  the  assessors  adopt  some 
other  standard  in  its  place,  they  will  not  be  able  to  define 
what  their  standard  is.  Would  it  be  possible  then  for  you 
to  tell  whether  they  are  doing  their  work  correctly  or  incor- 
rectly, if  you  have  not  the  slightest  idea  of  what  they  have 
adopted  as  a  standard?  Remember  that  inaccurate  assess- 
ment is,  in  some  respects,  worse  than  a  harmful  tax,  be- 
cause a  harmful  tax  that  is  impartially  enforced  falls  with 
equal  weight  upon  the  taxpayers  affected.  On  the  other 
hand,  an  inaccurate  assessment  falls  more  heavily  on  a  few 
than  on  others.  Again,  since  a  bad  tax  affects  all  concerned, 
it  stands  to  reason  that  it  will  be  sooner  or  later  abrogated, 
because  all  taxpayers  will  insist  on  its  abrogation.  But  in 
the  case  of  an  inaccurate  assessment,  and  consequently  an 
unjust  tax,  the  few  victims  affected  can  make  only  a  feeble 
protest  against  it  and  therefore  can  do  very  little  to  remedy 
the  evil,  even  if  they  realize  it. 

The  method  of  assessing  real  estate  at  full  value  was 
adopted  in  New  York  City  in  1903.  The  first  reason  for 
full  valuation  was  to  equalize  taxation  between  Brooklyn 
and  the  outlying  boroughs  on  the  one  hand  and  Manhattan 
on  the  other.^  Before  1903,  the  valuation  of  New  York 
real  estate  (old  city  of  New  York)  was  claimed  to  be  50 
per  cent  of  its  real  value,  and  that  of  Brooklyn  real  estate, 
70  per  cent  of  its  real  value." 

The  second  reason  for  assessing  property  at  full  value 
is  the  desirability  of  increasing  the  borrowing  capacity  of 
the  city  which  is  forbidden  by  law  to  transcend  10  per  cent 

*  Proceedings  of  National  Tax  Association  Conference  on  State  and 
Local  Taxation,  1907,  p;  386. 

^  See  a  pamphlet,  About  Greater  New  York — The  Financial  Condi- 
tion of  New  York  and  Brooklyn  Compared,  issued  by  Taxpayers'  Anti- 
Equalization  League  of  New  York,  February  5,  1896. 


213]  THE  REAL  ESTATE  TAX  129 

of  the  total  assessed  valuation  of  real  estate.  But  the  City 
of  New  York  has  increased  its  debt  so  rapidly  that  in  spite 
of  the  attempt  to  value  realties  at  100  per  cent  the  debt  mar- 
gin has  always  been  narrow. 

The  third  reason  is  that  to  value  property  at  100  per  cent 
is  more  logical  than  at  a  percentage.  As  stated  above,  the 
practice  among  the  deputies  in  New  York  City  was  to  assess 
real  estate  at  a  percentage  of  its  true  value.  Let  us  sup- 
pose that  a  parcel  is  assessed  at  60  per  cent.  Does  not  that 
percentage  presuppose  the  finding  of  a  full  value,  i.  e.,  100 
per  cent?  Otherwise,  how  could  it  be  possible  to  ascertain 
the  60  per  cent?  As  60  per  cent  means  60  per  cent  of  full 
value  or  100  per  cent,  it  is  obvious  that  the  full  value  must 
be  first  determined,  before  the  60  per  cent  can  be  deter- 
mined. Why  not  then  enter  the  one  hundred  per  cent  upon 
the  assessment  roll  and  reduce  the  rate  correspondingly  ? 

The  fourth  reason  for  full  valuation  is  to  do  justice  to 
personal  property.  Before  1903.  personal  property  was  as- 
sessed at  its  full  value  whereas  real  estate  only  at  a  per- 
centage of  its  full  value.  In  New  York  and  Richmond 
Counties,  real  estate  was  assessed  at  67  per  cent,  in  Kings 
at  68  per  cent,  and  in  Queens  at  80  per  cent  of  its  true  value. 

The  fifth  reason  for  full  valuation  is  to  treat  all  real  es- 
tate according  to  the  same  rule  of  justice  and  equity.  Sup- 
pose A's  real  property  is  assessed  at  60  per  cent  and  B's  at 
40  per  cent,  while  the  average  property  is  assessed  at  50  per 
cent.  A  will  have  no  redress  in  such  a  case,  for  if  he  states 
that  his  property  is  assessed  at  60  per  cent  he  is  still  under- 
assessed in  the  eye  of  the  law,  which  provides  for  a  full 
valuation.  Instead  of  securing  a  reduction  in  valuation,  he 
may  be  required  to  pay  a  tax  on  the  full  value.  He  will 
not,  therefore,  bring  the  matter  to  the  attention  of  the  de- 
partment and  prove  the  injustice  done  to  him.  But  sup- 
pose that  all  real  property  in  the  neighborhood  is  assessed 


130  FINANCES  OF  THE  CITY  OF  NEW  YORK  [314 

at  full  value  and  A  alone  is  over-assessed,  say  at  120  per 
cent.  In  such  a  case,  it  will  be  very  easy  for  him  to  prove 
the  injustice  done  to  him  and  to  have  the  assessment  re- 
duced to  the  common  standard.  At  the  same  time,  he  can 
ask  the  department  to  have  the  80  per  cent  assessment  of 
his  neighbor's  property  brought  up  to  100  per  cent. 

Since  1903,  New  York  City  has  witnessed  the  greatest 
advance  towards  equality  that  has  ever  been  made.  "  For- 
merly, every  man  was  at  the  mercy  of  the  assessor,  and 
especially  the  owners  of  property  of  small  value.  They 
were  the  ones  who  generally  paid  more  than  their  share."  ^ 
The  owners  of  property  which  had  contributed  less  than 
their  equitable  share  to  the  city  government  for  many  years 
prior  to  1903,  are  now  paying  their  fair  share.  The  in- 
crease in  the  amount  of  taxes  at  first  startled  them,  but 
they  are  satisfied  that  the  law  is  now  enforced  and  all 
owners  are  treated  almost  alike. 

1  See  the  address  on  The  Assessment  of  Real  Estate,  by  the  Hon. 
Lawson  Purdy,  delivered  at  the  dinner  of  the  Board  of  Real  Estate 
Brokers,  New  York,  March  7,  1903. 


CHAPTER  V 
Other  Taxes 

a.     the  special  franchise  tax 

I.  The  Purpose  of  the  Special  Franchise  Tax. — In  the 
years  prior  to  the  enactment  of  the  Special  Franchise 
Tax  law  it  was  brought  to  official  notice  at  Albany  that 
the  farmers,  the  market  gardeners,  the  mechanics  and  the 
tradesmen,  having  small  holdings,  were  paying  an  im- 
proper and  excessive  portion  of  the  general  taxes.  The 
Legislature  wished  to  lessen  the  load  of  taxation  on  those 
who  paid  more  than  their  proper  share  and  to  place  a 
part  of  it  on  those  whose  property  is  found  to  be  scat- 
tered all  over  the  state  worth  at  that  time  nearly  $200,- 
000,000,  which  was  not  taxed  at  all  and  had  never  been 
taxed.  This  untaxed  property  consisted  wholly  of  "spe- 
cial franchises,"  or  privileges  granted  to  the  public  ser- 
vice corporations  by  the  state  or  by  municipal  officers, 
for  the  purpose  of  furnishing  to  the  public,  transporta- 
tion, water,  light,  and  other  necessities  and  conveniences 
of  daily  life.  Its  value,  which  had  grown  by  leaps  and 
bounds,  rested  upon  the  right  to  use  in  some  manner 
the  public  highways  of  the  state,  but  it  was  intangible 
and  invisible.  The  Legislature,  however,  found  certain 
tangible  property  subject  to  taxation  situated  in  the  pub- 
lic streets  and  used  only  in  connection  with  and  as  a  part 
of  the  intangible  property  not  taxed. 

The  assessment  of  special  franchises,  which  are  defined 
by  law  as  a  form  of  real  estate,  carries  with  it  a  consider- 
able amount  of  difficulty.  It  is  an  intangible  and  invisible 
315]  131 


132  FINANCES  OF  THE  CITY  OF  NEW  YORK  [316 

municipal  property,  but  of  great  value.  By  value  is  not 
meant  market  value,  because  special  franchises  have  no 
market  value.  There  were  no  sales  to  guide  and  no  ex- 
perience from  ownership,  rental  or  use  to  rest  on.  This 
property  is  real  estate  only  in  name,  but  in  fact  it  is  only 
a  right  to  use  the  streets.  Aside  from  the  earning  ca- 
pacity of  a  going  concern,  the  value  of  the  property  de- 
pends upon  so  many  conditions  and  so  many  facts  and 
figures  that  its  valuation  cannot  be  determined  by  a  hard 
and  fast  rule.  For  this  reason  the  power  of  making  the 
valuations  of  special  franchises  has  been  entrusted  to  the 
state  board,  owing  to  their  experience,  greater  opportu- 
nities for  observations,  and  lack  of  desire  to  benefit  one 
locality  at  the  expense  of  another.' 

II.  The  Relation  between  Special  Franchises  and  Tangi- 
ble Property. — It  must  be  borne  in  mind  that  only  that 
portion  of  the  tangible  property  which  was  situated  in 
the  streets  and  public  highways  was  affected,  that  part 
lying  outside  of  the  streets  being  excluded  from  consider- 
ation. The  tangible  property  situated  in  the  streets  is 
so  incidental  to  and  dependent  upon  the  special  fran- 
chises that  they  would  have  no  substantial  value  if  they 
were  severed  from  them.  The  rails  and  ties  of  a  street 
railroad  situated  in  the  street  would  be  worth  nothing  in 
the  absence  of  a  special  franchise  to  use  them.  The  rela- 
tion between  the  tangible  property  and  the  intangible 
privilege  or  special  franchise  is  so  close  as  to  be  impos- 
sible of  separation.  The  value  of  either  resides  in  the 
union  of  both  and  can  be  ascertained  only  by  treating 
them  as  a  unit.^ 

^Proceedings  of  the  Fifth  Annual  Cofivention  of  the  National  Associ- 
ation of  Comptrollers  and  Accounting  Officers,  held  at  New  York,  1910, 
pp.  106-107. 

'^  People  ex  rel.  Metropolitan  Street  Railway  v.  Tax  Commissioners, 
174,  N.  Y.  417. 


317]  OTHER  TAXES  1 33 

III.  special  Franchise  Tax  usedasanOffset. — The  tangi- 
gle  property  assessed,  together  with  the  intangible  right, 
is  exempted  from  other  forms  of  taxation,  and  all  sums 
in  the  nature  of  a  tax,  paid  by  the  owner  of  a  special 
franchise  to  a  municipality  for  its  exclusive  use,  should 
be  deducted  from  the  tax  imposed  for  local  purposes.' 
This  is  the  result  of  a  long  contention  that  section  48  of 
the  general  tax  law  which  provided  that  all  payments 
made  by  the  public  service  corporations  under  the  old 
charters  conferred  upon  them  by  the  city,  as  percentages 
on  their  receipts  or  as  car-license  fees,  or  in  any  other 
way  outside  of  an  absolute  tax  on  the  real  estate,  should 
be  applied  to  offset  this  tax.  The  Supreme  Court  of 
New  York  decided  in  favor  of  the  contention  that  the 
amount  should  be  deducted.  Later  the  Court  of  Appeals 
upheld  it.^ 

The  commission  on  new  sources  of  revenue,  appointed 
by  the  Mayor  of  New  York  City  in  191 1,  argued  that  it 
could  see  no  justification  whatever  for  these  deductions, 
and  that  section  48  "  confuses  the  distinction  between 
a  corporate  franchise — the  right  to  exist  and  to  do  busi- 
ness as  a  corporation — and  a  public  franchise — the  privi- 
lege to  construct  and  operate  a  public  utility  in  the  city 
streets."  The  distinction  between  the  two  may  be  more 
clearly  brought  out  by  calling  attention  to  the  fact  that 
the  corporate  franchise  is  vested  only  in  a  corporation, 
while  the  public  or  special  franchise  may  be  owned  by  an 
association,  copartnership  or  individual,  as  well  as  by  a 
corporation. 

The  amount  of  money  paid  by  the  public-service  cor- 
porations for  the  privilege  to  use  the  streets  and  public 

^  People  ex  rel.  op  cit. 

'  Proceeding's  of  the  Fifth  Convention  of  the  National  Association  of 
Comptrollers ,  op.  cit. 


134  FINANCES  OF  THE  CITY  OF  NEW  YORK  [318 

highways,  is  not  a  tax,  but  the  purchase  price  for  the 
franchise  conferred.'  The  leading  authorities  on  taxation 
agree  that  a  tax  is  a  compulsory  contribution  to  the 
government  without  any  regard  for  benefit  conferred. 
A  sum  of  money  paid  by  a  public-service  corporation  is 
not  a  compulsory  contribution  or  a  tax,  but  a  rent  which 
is  a  consideration  paid  by  a  tenant  to  an  owner  of  prop- 
erty for  the  use  of  it.  Since  these  payments  are  not  a 
tax,  their  collection  cannot  result  in  double  taxation.  If 
theie  is  no  double  taxation,  there  is  no  justification  for 
making  these  compensations  or  rentals  deductible  from 
the  special  franchise  tax.''  The  tax  levy  on  special  fran- 
chises has  been  about  $8,250,000  a  year.  The  amount 
of  collections,  however,  falls  short  of  this  sum,  owing  to 
the  loss  of  a  considerable  proportion  of  the  tax  through 
equalization  and  statutory  deductions. ^ 

Since  1906,  the  city,  in  granting  new  franchises,  has 
sought  protection  from  the  evil  efTect  of  section  48  in 
the  following  clause  which  is  inserted  in  all  franchises  : 

"  Any  and  all  payments  to  be  made  by  the  terms  of 
this  contract  to  the  city  by  the  company  shall  not  be 
considered  in  any  manner  in  the  nature  of  a  tax,  but  such 
payments  shall  be  made  in  addition  to  any  and  all  taxes 
of  whatever  kind  or  description.   .  .   .""* 

IV.  The  Net  Earnings  Rule. — Although  the  assessment 
of  "  special  franchises  "  has  brought  to  the  city  consider- 
able revenue,  it  has  been  found  very  difficult  to  make  a 
correct  assessment.  The  New  York  Court  of  Appeals 
has   taken   the   net   earnings  as  a  basis  for  assessment, 

'  Report  of  the  Commission  on  New  Sources  of  City  Revenue,  submit-, 
ted  to  the  Mayor,  Jan.  11,  1913,  p.  31. 

"^ Ibid.,  p.  36. 

^Municipal  Year  Book,  1913,  p.  46. 

*  Report  of  the  Commission  on  New  Sources  of  City  Revenue,  p.  33. 


319]  OTHER  TAXES  13^ 

though  no  rule  can  be  laid  down  by  the  court  in  all 
cases.'  The  principle  is  that  the  public-utility  corpora- 
tions are  entitled  to  receive  six  per  cent  return  on  the 
capital  they  have  invested  in  the  business,  and  that  the 
excess  of  the  earnings  over  and  above  this  six  per  cent 
return  can  be  capitalized  to  ascertain  the  taxable  value 
of  the  special  franchises.  This  rule,  sound  as  it  is,  is 
however  complicated  by  many  other  considerations,  some 
of  which  are  pointed  out  below. ^ 

In  the  first  place,  we  must  look  into  the  character  of 
the  management  in  a  given  case,  taking  into  considera- 
tion the  varied  vicissitudes  of  fortune,  the  hazards  of  the 
business  and  the  skill  of  management.  No  one  doubts 
the  propriety  of  attributing  to  skill  or  ability  a  part  of 
the  earnings  of  a  corporation. 

In  the  second  place,  in  arriving  at  the  net  earnings,  the 
operating  expenses  must  be  deducted  from  the  gross 
earnings;  yet  we  all  know  that  "operating  expenses" 
can  be  so  stretched  as  to  wipe  out  the  entire  profit.  But 
as  the  new  system  of  accounting,  as  formulated  by  the 
New  York  Public  Service  Commissions,  is  gradually  im- 
proved, a  tax  on  net  earnings  will  gain  much  potency. 

In  the  third  place  the  assessors  are  frequently  brought 
face  to  face  with  a  situation  where  a  street  railroad  is 
considered  as  having  a  greater  franchise  value  than  a  gas 
or  electric  company,  by  reason  of  its  occupying  more 
space  in  the  streets  and  creating  more  nuisance;  yet  quite 
as  frequently  as  otherwise  a  gas  or  an  electric  company 
earns  more  profit  than  a  street  railroad. 

In  the  fourth  place,  how  much  of  the  net  earnings  of  a 

'People  ex  rel.  Jamaica  Water   Suppiy  Co.  v.  State  Board  of  Tax 
Commissioners,  October,  1909, 

'^  See  the  Annual  Report  of  the  State  Board  of  Tax  Commissioners, 
1909,  pp.  5-16. 


136  FINANCES  OF  THE  CITY  OF  NEW  YORK  [320 

company  should  be  regarded  as  a  reasonable  return  on 
the  company's  investment  outside  of  the  streets  and  pub- 
lic places?  Since  a  special  franchise  is  the  right  to  use 
or  occupy  the  streets  and  highways  for  business  pur- 
poses, whatever  investment  is  not  in  the  streets  and 
highways  is  not  subject  to  the  special  franchise  tax.  The 
question  is :  how  much  of  the  net  earnings  should  be 
allowed  to  be  deducted  ? 

The  above  discussion  leads  us  to  the  conclusion  that 
no  uniform  rule,  practical  in  its  application,  can  be  adopted 
in  the  determination  of  franchise  values.  £very  case 
must  be  judged  on  its  own  merits  and  by  its  own  cir- 
cumstances.' 

B.   THE  PERSONAL  PROPERTY  TAX 

I.  The  Personal  Property  Tax  a  Failure. — Under  the 
system  of  general  property  taxation  a  large  proportion 
of  personal  property  could  not  be  reached  by  the  ordi- 
nary methods  of  local  assessments  The  reports  of  every 
state  investigating  commission  for  the  past  thirty  years 
can  be  quoted  in  support  of  this  statement.  In  fact,  this 
failure  has  been  recognized  as  a  fact  by  the  states  which 
have  adopted  a  system  of  special  taxes  on  certain  classes 
of  personal  property.  The  imposition  of  special  taxes  by 
the  state  exempts  them  from  local  taxation.  In  the 
states  which  still  keep  the  old  system  in  use,  all  forms  of 
personal  property  are  theoretically  liable  to  local  taxa- 
tion, but  the  tax  falls  most  heavily  on  visible  and  tangi- 
ble property,  such  as  household  furniture,  machinery  and 
merchandise. 

Experience  and  theory  concur  in  the  conclusion  that 
there  has  not  vet  been  found  an  efficient  method  of  as- 
sessing  personal  property  at  full  valuation  and  taxing  it 
at  the  general  tax  rate.     Time  and  time  again  the  law  has 


32 1 ]  OTHER  TAXES  1 37 

been  strictly  enforced  in  order  to  reach  this  end,  with 
the  result  that  the  intangibles  escape  taxation  by  hiding, 

II.  The  Vicio7isness  of  the  Perso?tal  Property  lax. — 
Under  the  New  York  law  personal  property  is  divided 
into  two  classes:  (i)  the  tangibles,  such  as  horses,  cat- 
tle, live  stock,  carriages  and  wagons,  merchandise  and 
stock  in  trade,  machinery  and  tools,  furniture,  books, 
pictures,  jewelry,  clothing  and  personal  effects;  and  (2) 
the  intangibles,  such  as  corporate  bonds,  mortgages, 
both  on  real  and  personal  property,  promissory  notes, 
book  credits,  and  deposits  in  banks,  except  savings 
banks.^  As  already  stated,  the  intangibles  generally 
escape  by  hiding.  It  is  easy  to  reach  the  tangibles, 
but  the  effect  of  taxation  on  that  class  is  vicious. 
Assessment  is,  in  a  high  measure,  arbitrary.  Merchants 
and  manufacturers  whose  tangible  personal  property  can 
not  be  concealed  bear  the  burden.  Production  and 
enterprise  are  discouraged  and  the  prosperity  of  the  city 
is  impeded.  Pennsylvania  found  her  mistake  and  cor- 
rected it  by  exempting  all  personal  property  except  live 
stock  from  local  taxation,  with  the  result  that  the  cities 
were  greatly  benefited. ^ 

Those  who  pay  the  personal  tax  are  the  ignorant,  the 
helpless  and  the  conscientious.  The  conscientious 
include,  among  others,  trustees,  executors,  widows 
and  orphans.  The  property  held  by  these  classes  of 
people  is    in    most    cases    invested    in  high-grade    rail- 

^See  address  by  Mr.  Woodbury,  State  Tax  Commissioner,  in  Pro- 
ceedings of  State  and  Local  Taxation,  International  Tax  Conference, 
vol.  — . 

"See  a  pamphlet,  Taxatiofi  of  Persoiial  Property  in  the  State  of  New 
YorJi,  published  by  the  Department  of  Taxes  and  Assessments,  1912, 
pp.  S  and  9. 

^  Proceedings  of  the  Merchants'  Association  of  New  York,  April,  1910, 
pp.  17-18. 


138  FINANCES  OF  THE  CITY  OF  NEW  YORK  [322 

road  bonds  and  real-estate  mortgages  producing  an 
annual  income  of  four  per  cent.  From  one-half  to  two- 
thirds  of  this  income,  or  two  per  cent  to  three  per  cent 
of  the  capital  goes  to  the  city.' 

III.  The  Tax  Uncollectible. — The  history  of  personal 
taxation  in  New  York  City  during  the  last  fourteen 
years  shows  that  the  tax  has  not  been  and  cannot  be 
collected.  In  consequence  of  this,  the  city  carried  in 
1910  as  an  asset  over  $30,000,000  of  unpaid  personal  tax 
assessments,  which  proved  absolutely  uncollectible.  This 
amount  increased  at  the  rate  of  $3,000,000  or  more  a 
year,  which  probably  never  will  be  collected.  The  tax- 
levy  budgets  before  1906  failed  adequately  to  provide  for 
this  deficiency  and  the  revenue  from  the  personal  tax  fell 
several  millions  short  of  the  estimate.  The  result  was 
that  corporate  stock  was  issued  to  cover  the  deficiency, 
amounting  to  from  $30,000,000  to  $40,000,000,  and  the 
proceeds  were  expended  for  current  purposes.'' 

IV,  The  Substitution  of  Special  Taxes  for  the  Personal 
Tax. — In  place  of  the  general  personal  tax,  there  have 
gradually  come  into  use  in  New  York  State  a  number  of 
special  state  taxes,  and  the  tendency  to  abolish  the  gen- 
eral tax  and  to  institute  classes  of  special  taxes  in  its 
stead  is  on  the  increase.  This  policy  has  no  direct  re- 
lation with  the  system  of  local  taxation  except  that  the 
share  of  direct  state  taxes  on  property  assessed  locally 
has  been  diminished.  Although  this  sometimes  takes 
away  from  the  localities  a  source  of  revenue,  its  loss  is 
more  than  compensated  by  the  relief  from  state  taxes  on 

^Report  on  Taxation,  by  Special  Committee  Association  of  the  Bar 
of  the  City  of  New  York,  March  10,  1913. 

"^Proceedings  of  the  New  York  Merchants'  Association,  April,  1910, 
p.  17.  See  also  the  Report  of  the  Advisory  Commission,  1907,  on  this 
point. 


323]  OTHER  TAXES  139 

real  estate.  It  should  also  be  remembered  that  the 
revenue  obtained  in  this  manner  by  the  state  is  largely 
spent  for  projects  that,  if  completely  carried  out,  add  to 
the  value  of  taxable  real  estate,  such  as  highways  im- 
proved by  state  aid.  Cities  generally  do  not  receive 
direct  benefit  from  such  use  of  state  revenue;  but  if  the 
general  conditions  are  improved  as  a  result  of  the  ex- 
penditure, the  cities  are  certainly  indirectly  benefited 
through  the  stimulus  to  the  industries  and  commerce, 
the  chief  source  from  which  the  city  land  values  spring. 
Thus,  in  the  State  of  New  York,  the  revenue  system  has, 
during  the  past  twenty  years,  changed  from  direct  taxa- 
tion to  special  taxation.  A  number  of  special  taxes,  now 
amounting  to  approximately  forty  million  dollars  a  year, 
have  been  developed.'  The  residue  that  is  still  taxed  as 
personal  property  can  be  reached  by  law.  Stock  and 
plant  of  merchants  and  manufacturers,  jewelry  and  house- 
hold furniture,  and,  unfortunately,  the  decedent's  estates, 
which  have  to  be  declared  in  the  surrogate's  court,  are 
about  the  only  forms  of  personal  property  now  taxable  in 
the  State  of  New  York. 

In  the  preceding  chapter  on  real  estate  taxation,  I  have 
pointed  out  the  wisdom  of  the  policy,  adopted  in  New 
York  State,  of  separating  the  state  tax  from  the  local 
tax.  The  state  reserves  for  itself  the  special  classes  of 
personal  taxes,  leaving  the  real-estate  tax  to  the  cities 
and  counties.  But  as  a  matter  of  fact  the  state  does  not 
apply  all  the  revenues  derived  from  special  taxation  to 
state  purposes  only.  Where  the  personal  property  as- 
sessed is  of  a  distinctly  local  character,  or  where  the  value 
of  the  property  springs  from  strictly  municipal  conditions, 
it  stands  to  reason  that  the  taxes  should  go  to  the  local 

'An  address  on  Municipal  Taxation,  by  A.  C.  Plej'dell,  delivered 
before  the  League  of  American  Municipalities,  Montreal,  1909,  p.  3. 


140  FINANCES  OF  THE  CITY  OF  NEW  YORK  [324 

treasury,  or  at  least  be  distributed  equally  between  the 
state  and  various  localities  where  the  taxes  are  levied  and 
paid.  For  these  reasons  New  York  State  shares  with  the 
cities  and  counties  the  revenue  derived  from  the  following 
three  classes  of  personal  taxes,  each  of  which  will  be  dis- 
cussed in  detail : 

(i)  Taxes  on  banks  and  trust  companies.  The  tax  on 
banks  is  collected  and  received  by  the  localities,  and  the 
tax  on  trust  companies  by  the  state. 

(2)  The  mortgage-recording  tax,  the  proceeds  of 
which  are  distributed  equally  between  the  state  and  the 
localities. 

(3)  The  liquor  licenses,  the  proceeds  of  which  are  also 
distributed  equally  between  the  state  and  localities. 

C.       TAXES   ON   BANKS  AND  TRUST  COMPANIES 

I.  T/ie  Bank  Tax  under  the  General  Property  Tax. — 
The  method  of  taxing  banks  in  New  York  before  1901 
was  similar  to  that  in  almost  all  other  states.  It  was  the 
assessment  of  the  shares  of  national  and  state  banks  at 
their  market  value.  They  were  then  taxed  at  the  local 
tax  rate  for  local  and  state  purposes.  The  evils  of  this 
method  were  many.  Upon  investigation  it  was  found 
that  the  local  assessors  assessed  the  banks  by  as  many 
different  methods  as  there  were  boards  of  assessors.  In 
one  place  the  assessment  of  bank  shares  might  be  the 
assessment  of  one-third  of  the  market  value,  and  that  of 
real  estate  of  eighty  per  cent  of  its  market  value.  In 
another  place  real  estate  might  be  assessed  at  less  than 
fifty  per  cent  of  its  market  value  and  the  bank  shares  at 
full  value.  This  was  the  cause  of  the  inequality  com- 
plained of  by  the  banks.  It  rendered  fair  competition 
between  banks  in  different  localities  impossible,  and  dis- 
couraged the  banking  business  to  a  considerable  extent. 


325]  OTHER  TAXES  u^i 

All  this  was  the  result  of  the  operation  of  the  laws  de- 
signed to  tax  all  the  widely  different  classes  of  property 
in  the  same  way  and  at  the  local  rate. 

II.  The  special  Tax. — The  State  of  New  York  has  been 
singularly  successful  in  remedying  the  manifold  evils  by 
an  amendment  to  the  law  in  1901.  National  banks  and 
banks  incorporated  under  the  laws  of  New  York  are 
treated  exactly  alike.  All  banks  and  trust  companies  are 
required  by  the  law  to  report  their  capital,  surplus  and 
undivided  profit  as  shown  by  their  books.  The  total  net 
assets  thus  shown  are  subject  to  a  tax  of  one  per  cent, 
without  deductions  from  the  value  of  shares  because  of 
personal  indebtedness,  as  in  the  case  of  the  assessment 
of  other  personal  property.  No  deduction  is  allowed  for 
any  reason  whatever.'  For  instance,  the  investment  of 
capital  stock,  surplus,  or  undivided  profit  in  United  States 
bonds,  etc.,  does  not  exempt  the  shares  from  taxation. 
The  tax  on  the  trust  companies  is  collected  and  received 
by  the  state,  while  the  tax  on  the  banks  is  collected 
locally  as  a  local  revenue.  The  latter  is  on  the  value  of 
shares,  such  value  being  ascertained  by  adding  together 
the  amount  of  capital  stock,  surplus  and  undivided  profits, 
and  dividing  the  result  by  the  number  of  outstanding 
shares.^  The  reason  why  the  bank  tax  is  levied  on  the 
shares  of  its  stock  rather  than  on  its  capital  stock  is  be- 
cause the  legal  decisions  of  the  United  States  Supreme 
Court  forbid  the  States  from  taxing  a  great  portion  of 
the  capital  stock  invested  in  the  United  States  bonds. 
The  tax  on  the  shares  is  designed  to  escape  the  results 
of  these  decisions. ^ 

'  Report  of  the  Committee  011  State  and  Mtmicipal  Taxation,  Chamber 
of  Commerce  of  the  State  of  New  York,  1903,  p.  17.  -Ibid. 

^See  an  article  on  "  A  Rational  Scheme  of  State  and  Municipal  Tax- 
ation," by  Edward  Cassin,  in  Taxpayer  s  DTagazine,  vol.  vii,  no.  3, 
Aug.,  igcS,  p.  IT. 


142  FINANCES  OF  THE  CITY  OF  NEW  YORK  [326 

The  power  of  the  state  to  tax  banks  is  restricted  by 
the  federal  statute  that  national  banks  cannot  be  taxed 
at  a  greater  rate  than  other  moneyed  capital.  The 
statute  has  a  similar  efifect  on  the  other  moneyed  capital, 
because  it  would  not  seem  just  and  fair  to  tax  the  other 
moneyed  capital  at  a  greater  rate  than  the  national  banks. 
"  Moneyed  capital "  has  been  defined  by  the  courts  to 
include  trust  companies  in  the  same  class  as  banks,  and 
to  exclude  almost  every  other  corporation.' 

The  tax  is  assessed  against  the  owners  of  the  shares 
respectively,  not  as  in  the  case  of  other  personal  prop- 
erty, in  the  district  of  their  residence,  but  in  the  district 
where  the  bank  is  located.  This  is  a  departure  from  the 
method  adopted  by  some  other  states  where  the  revenue 
obtained  from  bank  taxes  is  transmitted  to  the  districts 
of  the  stockholders'  residence.  This  method  of  distribu- 
tion cannot  be  justified.  Since  the  bank  is  doing  its 
business  in  the  city  or  town  where  it  is  situated,  and  pro- 
tected, and  where  it  gains  its  prosperity,  it  is  a  logical 
conclusion  that  the  revenue  should  go  to  the  treasury  of 
the  community  in  which  the  bank  is  situated. 

The  banks  are  required  by  law  to  pay  this  tax  and  to 
deduct  from  the  dividends  due  to  shareholders  the  amount 
of  taxes  paid  on  their  respective  shares,  but  retain  a  lien 
on  all  property  of  shareholders  in  their  hands  for  reim- 
bursement of  the  amount  paid  by  them  with  interest.^ 

III.  The  Benefits  of  the  special  Tax. — As  stated  above, 
the  tax  is  one  per  cent  of  capital,  surplus  and  undivided 

^  See  an  address  b}^  Lawson  Purdy,  President  of  the  Department  of 
Taxes  and  Assessments,  New  York  City,  on  "  Outline  of  a  Model  Sys- 
tem of  State  and  Local  Taxation,"  in  Proceedings  of  the  Natio7ial  Con- 
ference of  State  and  Locat  Taxation,  1907,  pp.  71-2. 

'  Report  of  the  Committee  on  State  and  Municipal  Taxation,  op.  cit., 
p.  17. 


327]  OTHER  TAXES  1 43 

profits,  no  deduction  being  allowed  on  account  of  the 
real  estate  tax.  Therefore,  if  the  real  estate  owned  by 
the  banks  and  trust  companies  is  taxed  at  the  local  rate, 
it  cannot  escape  double  taxation,  which  works  unfairly 
on  them.  The  justification  of  this  is,  however,  found 
in  the  low  rate  of  taxation  on  the  book  value.  This 
method  has  a  further  advantage  in  that  it  is  easy  to  col- 
lect the  tax  and  at  the  same  time  a  restriction  is  placed 
upon  the  tendency  on  the  part  of  the  banks  and  trust 
companies  to  hold  an  unnecessary  amount  of  real  estate.' 
There  is  a  still  further  benefit  in  that  under  this  scheme  the 
same  amount  of  revenue  can  be  produced  as  under  the  old 
form  of  assessment  on  market  value  and  taxation  at  the 
local  tax  rate,  even  though  the  present  tax  rate  is  lower 
than  the  old  local  tax  rate.  But  this  benefit  to  the  gov- 
ernment is  counterbalanced  by  the  benefit  to  the  banks  in 
the  form  of  security,  equality  and  uniformity.  Therefore, 
by  the  introduction  of  a  special  tax  on  banks,  that  falls 
equally  on  all  competing  capital,  uninfluenced  by  the 
character  of  investments,  automatic  and  free  from  any 
discretion  on  the  part  of  the  assessors,  uniform  through- 
out the  state,  and  reasonable  in  amount.  New  York  has 
removed  all  the  evils  which  had  existed  under  the  old 
system. 

Many  people  are  inclined  to  look  upon  financial  insti- 
tutions as  especially  fit  for  taxation,  but  it  should  be 
borne  in  mind  that  burdensome  taxation,  especially  when 
it  is  imposed  unequally,  is  a  tremendous  obstacle  in  the 
w'ay  of  extending  banking  facilities  and  is  consequently 
a  check  to  the  growth  and  prosperity  of  the  community. 

IV.  Comparisoji  Between  the  Old  and  Nezv  Tax. — Prior 
to  the  enactment  of  the  bank-tax  law%  banks  were  taxed 

'  Outline  of  a  Model  System  of  State  and  Local  Taxation,  op.  cit. 


144  FINANCES  OF  THE  CITY  OF  NEW  YORK  [328 

under  the  personal  tax  law,  and  as  the  shares  of  stock 
could  be  easily  concealed,  the  law  could  not  reach  them. 
This  led  to  the  enactment  of  the  present  law,  imposing 
a  tax  of  one  per  cent,  not  on  the  shares  of  stock,  but  on 
the  capital,  surplus  and  undivided  profits  of  all  state  and 
national  banks,  which  could  not  be  hidden.  In  191 3  the 
city  revenue  derived  from  the  bank  tax  was  approxi- 
mately $3,400,000. 

D,    THE  TAX    ox   MORTGAGES 

I.  T/ie  Undesirability  of  the  Old  Mortgage  Tax  Lazvs. — 
Prior  to  July,  1905,  mortgages  were  taxable  in  the  State 
of  New  York  as  a  form  of  personal  property  under  the 
general  property  tax.'  The  tax  was  subject  to  the  re- 
duction for  debts.  It  was  imposed  on  the  net  amount 
of  the  mortgage  at  the  full  local  tax  rate,  ranging  be- 
tween I  ^  per  cent  and  3  per  cent.  The  amount  of 
mortgages  caught  for  the  purpose  of  taxation  w^as  very 
small.  Those  persons  who  were  caught  were  generally 
the  least  able  to  bear  the  burden,  because  they  were 
generally  women  and  children  mentioned  in  wills  as 
beneficiaries.  The  gross  injustice  of  the  tax  was  further 
aggravated  by  the  rise  in  interest  rates,  due  to  the  fact 
that  the  fear  of  taxation  prevented  many  lenders  from 
lending  money  on  mortgage  security  except  at  a  higher 
rate.^  Thus  the  liability  to  taxation  caused  the  interest 
rate  to  rise,  notwithstanding  the  fact  that  only  a  very 
small  percentage  of  the  mortgages  was  actually  reached. 

In  Massachusetts,  mortgages  were  exempted  from 
taxation  in  1881.  An  examination  of  the  mortgages  in 
force  in   1889,  which  were  generally  made  after  the  law 

'  Laws  of  1896,  ch.  908. 

'A  pamphlet,  Mortgage  Taxation  ajid  Interest  Rates,  by  Nev;  York 
Tax  Reform  Association,  IQ06,  p.  i. 


22g]  OTHER  TAXES  I_j.5 

exempting  mortgages  was  passed,  showed  that  the  inter- 
est rate  in  Boston  was  lower  than  that  in  the  city  of  New 
York.  If  other  influences  were  equal  in  both  cities,  the 
interest  rate  in  New  York  City  in  1889  should  have  been 
lower  than  in  Boston,  as  more  money  comes  to  a  larger 
city  than  to  a  smaller  one.  But  it  has  been  found  to  be 
a  fact  by  the  New  York  Tax  Reform  Association  that 
the  rate  was  higher  in  the  New  York  counties  than  in 
Boston  by  li  mills  in  New  York,  7  mills  in  Erie  county 
and  over  6  mills  in  Monroe  county.  Such  a  thing  could 
not  happen  were  it  not  for  the  liability  of  mortgages  in 
these  counties  to  taxation.' 

On  July  1st,  1905,  a  new  law  was  enacted  in  the  State 
of  New  York,  by  which  all  mortgages  recorded  after  that 
date  Vt'ere  annually  taxed  at  the  rate  of  one-half  of  one 
per  cent  irrespective  of  the  place  where  the  owner  resides 
and  without  any  deduction  for  his  personal  debts.  The 
tax  was  payable  at  the  recording  office.''  The  record  of 
the  mortgages  recorded  during  the  last  six  months  of 
1904  under  the  old  laws  and  during  the  last  six  months 
of  1905  under  the  annual  mortgage  tax  law,  gave  indis- 
putable evidence  of  the  undesirable  effect  of  mortgage 
taxation  upon  the  rates  of  interest.  We  now  know  that 
under  the  old  law  the  rate  of  interest  in  the  State  of  New 
York  increased  by  a  mill  and  a  half  in  some  counties  and 
as  much  as  three  or  four  mills  in  other  counties,  on  ac- 
count of  the  liability  to  taxation.  We  also  know  that 
under  the  annual  mortgage  tax  law  the  rate  of  interest 
increased  over  what  the  rate  would  be  were  mortgages 
exempt  from  taxation. ^ 

'  A  pamphlet,  op  cit. 

'■'Laws  of  1905,  ch.  729. 

^Mortgage  Taxation  and  Interest  Rates,  p.  8. 


146  FINANCES  OF  THE  CITY  OF  NEW  YORK  [330 

II.  The  Taxation  of  Mortgages  Unjust  and  Undesirable. 
— Not  only  are  the  owners  of  burdened  real  estate  discrim- 
inated against,  but  the  erection  of  new  buildings  is  greatly 
checked  by  the  imposition  of  this  tax.  Buildings  are 
generally  erected  with  borrowed  money,  and  as  the  tax 
on  mortgages  is  shifted  to  the  mortgagor  or  borrower, 
it  adds  to  the  cost  of  buildings.  The  reduction  of  build- 
ings leads  first  to  the  diminution  of  demand  for  building 
materials,  and  second  to  the  lessening  of  opportunities 
for  employment,  and  third  to  the  increase  of  rentals.  On 
these  grounds  the  taxation  of  mortgages  is  most  unde- 
sirable and  should  be  abolished.  As  it  was  impossible  to 
abolish  it  entirely,  it  has  been  replaced  by  a  recording  tax, 
which  relieves  it  from  the  annoyance  and  risk  arising  from 
the  annual  tax.  Moreover,  a  tax  on  property  and  a  tax 
on  a  mortgage  on  that  property  is  double  taxation,  be- 
cause both  taxes  are  paid  by  the  owner  who  borrows. 
If  his  property  is  estimated  at  $15,000,  but  is  mortgaged 
to  his  lender  for  $10,000,  he  has  an  equity  of  only  $5,000 
in  the  property,  yet  he  pays  a  direct  tax  on  $15,000  of 
property  and  an  indirect  tax  on  the  $10,000  of  mortgage, 
because  the  latter  is  shifted  to  him  through  a  loading  in 
the  interest  charge.  All  this  undesirable  situation  was 
relieved  by  the  new  mortgage  recording  tax  of  1906,  as 
we  shall  soon  see.  In  several  of  the  American  states  the 
law  allows  a  deduction  of  the  amount  of  the  mortgages 
from  the  assessed  value  of  the  real  estate,  the  tax  being 
payable  either  by  the  owner  of  the  real  estate  or  of  the 
mortgage.  Such  a  law  is  deserving  of  praise,  as  it  elimi- 
nates the  evil  of  double  taxation. 

III,  The  New  Mortgage  Recording  Tax. — A   law  was 
passed  in  1906'  abolishing  the  annual  tax  and  replacing 

'  Laws  of  1906,  ch.  532. 


23 1  ]  OTHER  TAXES  I47 

it  with  a  recording  tax,  which  is  levied  once  for  all  at  the 
rate  of  one-half  of  one  per  cent.  It  is  perhaps  unjust  to 
pick  out  mortgages  from  the  many  different  forms  of 
personal  property  and  to  make  them  subject  to  a  special 
tax.  For  many  reasons  such  a  tax  is  also  undesirable, 
but  as  the  mortgages  are  publicly  recorded,  it  is  a  simple 
and  easy  matter  to  levy  a  tax  on  them  at  the  time  they 
are  recorded.  As  stated  above,  personal  property  taxa- 
tion has  been  a  failure  in  almost  all  states,  owing  to  the 
fact  that  most  of  the  classes  of  personal  property  are 
easy  of  concealment,  and  therefore  escape  taxation. 
Mortgages,  however,  cannot  escape  taxation  because,  to 
be  of^cially  recognized,  they  must  be  publicly  recorded. 
For  this  reason  the  law  pertaining  to  the  mortgage  tax 
as  it  is  in  vogue  in  New  York  today  can  be  effectively 
enforced;  the  taxes  received  annually  are  certain  in 
amount. 

IV.  The  Desirable  Features  of  the  Mortgage- Recordhtg 
Tax. — The  mortgage  recording  tax  has  many  desirable 
features,  of  which  the  following  are  the  most  important : 

(i)  The  interest  rates  are  lowered  as  a  result  of  the 
law  of  1906.  Money  is  more  freely  lent  on  mortgages. 
In  states  where  the  annual  mortgage  tax  still  exists, 
many  investors  hesitate  to  lend  on  mortgages  because 
of  their  aversion  for  the  subterfuges  necessary  to  avoid- 
ing the  confiscaton  of  income. 

(2)  Another  desirable  feature  is  the  freedom  of  the 
debtor  from  the  burden  of  taxation.  It  must  be  accepted 
as  inevitable  that  the  tax  will  fall  on  the  borrower  irre- 
spective of  who  is  required  by  law  to  pay  it — the  lender 
or  the  borrower — but  the  exaction  of  the  present  low  rate 
of  tax  is  by  no  means  grievous.  The  average  payment 
of  the  tax,  even  in  New  York  City,  would  hardly  go  be- 
yond twenty-five  dollars  in  any  case,  and  the  average  life 


148  FINANCES  OF  THE  CITY  OF  NEW  YORK  [332 

of  a  mortgage  runs  from  four  to  seven  years.  A  pay- 
ment of  the  amount  indicated  hardly  seems  onerous,  con- 
sidering the  amount  of  protection  accorded  to  the  tax- 
payers by  the  state.  On  the  basis  of  a  five-year  duration, 
a  half  per  cent  recording  tax  means  only  one- tenth  of 
one  per  cent  on  the  amount  of  the  mortgage  in  a  year. 

(3)  The  third  desirable  feature  of  the  recording  tax  is 
that  it  is  self-administering.  The  revenue  comes  in  auto- 
matically, the  administrative  details  are  by  no  means 
cumbersome,  and  the  cost  to  the  state  is  insignificant.' 

(4)  The  fourth  desirable  feature  is  that  the  revenue- 
proceeds  from  this  tax  are  highly  satisfactory.  One-half 
of  the  proceeds  goes  to  the  state  and  the  other  half  goes 
to  the  general  fund  of  the  city,  after  the  expenses  of  col- 
lection have  been  deducted.  The  city's  share  varied 
from  $184,000  in  1905,  under  the  annual  tax  law,  to 
$1,699,525  m  1907  under  the  recording-tax  law.^  How- 
ever, 1907  was  a  year  of  unusual  activity  in  real  estate 
business.  To-day  the  tax  yields  about  $1,350,000  a  year.^ 
Further,  it  is  reasonable  to  believe  that  a  large  propor- 
tion of  the  mortgages  represent  the  investment  of  large 
amounts  of  capital;  and  a  large  proportion  of  the  pro- 
ceeds of  the  tax  is  derived  from  mortgages  of  this  char- 
acter. In  such  cases,  the  tax  would  be  paid  as  one  of 
the  expenses  of  financing  the  project  and  would  be  borne 
by  a  class  of  people  capable  of  bearing  it. 

5.  The  Alleged  Defects  of  the  Recording  Tax. — The 
present  mortgage-tax  law  treats  all  mortgage  securities 
in  the  same  way,  irrespective  of  the  great  difference  in 

'  See  an  article  on  "  Mortgage  Recording  Tax,"  by  C.  F.  Robinson, 
in  Political  Science  Quarterly,  1910,  pp.  609-624. 

*See  an  address  on  The  System  of  Revenue  in  New  York  City,  de- 
livered by  Mr.  Mclntyre,  at  the  Bureau  of  Municipal  Research.  1913. 

*  Municipal  Year  Boolt,  1913,  p.  48. 


233]  OTHER  TAXES  149 

their  duration  of  life.  Thus,  a  mortgage  security  whose 
Hfe  is  as  short  as  one  year,  is  taxed  at  the  same  rate  and 
on  the  same  basis  as  another  whose  life  extends  to  fifty 
years.  The  average  life  of  the  ordinary  individual  mort- 
gage is  presumably  five  years,  and  since  a  new  mortgage- 
recording  tax  will  be  imposed  at  the  end  of  its  five  years' 
life,  when  the  new,  or  more  properly,  the  renewed,  mort- 
gage, springs  into  existence,  it  is  clear  that  the  tax  will 
be  imposed  ten  times  for  a  period  of  fifty  years.  On  the 
other  hand,  the  corporate-trust  mortgage,  running  for 
fifty  years,  would  only  be  taxed  once  during  that  entire 
period.  This  manifest  discrimination  in  favor  of  the 
corporate-trust  mortgages  and  against  the  ordinary  in- 
dividual mortgages,  should  not  be  allowed  to  continue, 
and  the  right  of  exemption  should  not  extend  beyond 
five  years.  The  institution  of  a  new  five-year  tax  will 
not  only  do  away  with  the  present  manifest  injustice,  but 
will  also  materially  increase  the  state  and  local  revenue 
from  this  particular  source  of  taxation.  But  we  must 
consider  the  other  side  of  the  proposition.  One-half  of 
one  per  cent  is  not  an  onerous  tax,  even  upon  a  three- 
months'  mortgage.  It  would  probably  be  possible  to 
make  a  smaller  exaction  in  the  case  of  short-term  mort- 
gages, but  the  administrative  difficulties  would  be  serious. 
A  periodical  examination  of  the  outstanding  mortgages, 
for  the  purpose  of  listing  those  mortgages  on  which  no 
further  tax  has  been  paid,  would  vastly  increase  the  diffi- 
culties of  the  administrative  mechanism.' 

Another  defect  of  the  mortgage-recording  tax  is  eva- 
sion. It  is  estimated  that  the  average  amount  secured 
by  mortgages  upon  real  property,  upon  which  taxes  have 
been  paid  for  the  period  of  three  years  from  1907  to  1910, 

'  See  the  Alorti^age  Recording  Tax,  op.  cit. 


I^o  FINANCES  OF  THE  CITY  OF  NEW  YORK  [334 

is  approximately  $740,000,000.'  Considering  the  im- 
mensity of  mortgage  indebtedness  secured  by  corporate- 
trust  mortgages,  and  the  duration  of  30,  40,  and  even  50 
years,  "it  is  safe  to  assume  as  a  low  estimate  that  there 
is  outstanding  (in  1910)  upwards  of  4000  millions  of  in- 
debtedness secured  by  mortgages  upon  real  estate." 
Deducting  from  this  sum  the  annual  amount  of  750  mill- 
ions upon  which  an  annual  tax  is  levied  and  paid  and 
650  millions  as  representing  the  amount  of  mortgages 
which  go  to  make  up  the  capital  stock,  surplus  and  un- 
divided profit  of  banks  and  trust  companies  and  the  sur- 
plus and  undivided  earnings  of  savings  banks,  which  are 
taxed  annually,  there  remains  2600  millions  of  mortgages 
which  escape  taxation." 

K.    THE    EXCISE    TAX 

The  excise  tax,  /.  e.,  the  liquor  tax,  is  imposed  on 
saloons  in  the  form  of  a  fee,  which  is  $1,200  per  annum 
for  each  saloon  in  Manhattan  and  Brooklyn.  This  is  the 
maximum  rate,  the  fee  being  smaller  in  other  boroughs, 
and  graduated  on  the  basis  of  the  character  of  the  liquor 
establishment  and  the  population  of  the  borough.^  Of 
the  $11,638,000  collected  from  this  source  in  1898  in  the 
entire  state  about  $8,178,000  was  collected  in  the  city  of 
New  York.  From  that  year  until  1904  the  proportion 
which  the  city  received  was  two-thirds,  or  66^  per  cent. 
of  the  total  amount  collected  within  its  own  limits.  In  the 
latter  year  the  tax  was  increased  by  one-half,  so  that  an  $800 
fee  was  raised  to  $1,200  for  each  saloon.  However,  the 
share  which  the  city  was  entitled  to  receive  was  no  longer 

'  Annual  Report  of  the  State  Board  of  Tax   Commissioners,  New 
York,  1910,  p.  8. 

» Ibid. 

"^Municipal  Year  Book  of  the  City  of  New  York,  1913,  p.  48. 


335]  OTHER  TAXES  151 

two-thirds,  but  one-half,  as  at  the  present  time.  There- 
fore, although  the  saloonkeepers  are  paying  50  per  cent 
more  tax,  the  city  receives  little  more  now  than  before 
1904.'  At  present  about  10,500  liquor  certificates  are  in 
force  within  the  city,  yielding  a  net  municipal  revenue  of 
approximately  $5,775,000.''  This  revenue,  like  the  reve- 
nue from  the  mortgage  tax  and  bank  tax,  is  credited  to 
the  general  fund  of  the  city,  but  it  is  subject  to  a  reduc- 
tion as  a  result  of  a  special  statute  pledging  a  certain 
percentage  of  it  to  departmental  pension  funds,  and  also 
to  certain  societies  that  are  carrying  on  quasi-public 
functions.^ 

'See  an  address  by  Mr.  R.  B.  Mclntyre,  Secretary  of  the  Commis- 
sion of  New  Sources  of  Revenue,  on  New  Vork's  System  of  Revenue, 
delivered  at  the  Bureau  of  Municipal  Research,  April  2,  1913. 

^ MtiJiicipal  Year  Book,  1913,  p.  48. 

'See  Mr.  Mclntyre's  address,  supra. 


PART    III 
THE   CITY   DEBT 


CHAPTER  VI 

Origin,  Classification,  Limit  and  Computation  of  the 

City  Debt 

The  City  of  New  York  borrows  money  for  two  purposes 
which  are  so  fundamentally  different  that  they  fall  properly 
under  two  heads:  (i)  loans  to  meet  current  expenditures, 
and  (2)  loans  for  the  acquisition  and  construction  of  im- 
provements. 

a.  temporary  loans 
I.  Revenue  Bonds. — In  New  York,  as  in  many  other 
American  cities,  taxes  are  collected  so  late  in  the  fiscal  year 
that  revenue  bonds  are  issued  to  pay  the  cost  of  administra- 
tion, in  anticipation  of  future  tax  receipts.  Loans  of  this 
character  do  not  usually  constitute  a  part  of  the  debt  that  is 
subject  to  the  constitutional  limitations  on  municipal  indebt- 
edness. So  long  as  the  revenue  bonds  issued  are  not  be- 
yond the  amount  of  current  revenue  collectible  within  a  rea- 
sonable time,  or  so  far  as  the  excess  of  such  bonds,  if  any 
exists,  can  be  retired  from  the  next  year's  tax  lev3%  no  harm 
is  done,  except  that  the  taxpayers  have  to  bear  the  addi- 
tional burden  of  the  interest  charge  on  the  revenue  bonds. 
In  case  the  excess  is  left  unredeemed,  it  must  be  funded 
into  a  permanent  interest-bearing  debt,  representing  past 
operating  expenses.  The  use  of  this  method  of  financing 
constitutes  a  serious  municipal  problem,  since  the  payment 
of  the  interest  on  such  a  debt  is  a  pure  waste  and  tends  con- 
stantly to  increase  the  burden  upon  the  taxpayers  of  many 
municipalities. 

339]  155 


156  FIXAXCES  OF  THE  CITY  OF  XEll'  YORK  [3,^0 

It  is  sometimes  argued  that  the  iate  collection  of  taxes, 
which  is  the  cause  of  the  revenue-bond  issue,  is  benehcial 
to  delinquent  taxpa^-ers.  because,  by  postponing  the  payment, 
of  taxes  and  using  the  money  for  private  purposes,  they 
may  avoid  the  trouble  of  borrowing  money  from  banks  at  a 
high  rate  of  interest,  while  the  city,  owing  to  its  good  credit, 
can  get  money  at  a  low  rate  of  interest.  In  oiher  words, 
the  city  can  borrow  money  for  the  taxpayers  at  a  lower  rate 
than  they  can  themselves,  and  consequently,  the  late  collec- 
tion of  taxes  is  to  be  commended  as  a  sound  policy  for  any 
municipal  government.  This  view  makes  the  beneht  of  de- 
linquent taxpayers,  not  that  of  the  city  as  a  whole,  the  cri- 
terion of  a  sound  tiscal  policy.  The  interest  payment  on 
the  revenue  bonds,  issued  in  anticipation  of  taxes  levied  and 
promptly  redeemed,  is  no  doubt  of  advantage  to  delinquent 
taxpayers  who  are  under  constant  pressure  for  financial 
accommodation.  It  is.  however,  an  unfair  charge  upon  the 
community,  especially  as  a  large  majority  of  taxpayers  de- 
sire and  are  able  to  pay  their  taxes  when  the  money  is 
needed. 

During  the  iirst  administration  of  the  present  comptroller, 
a  step  in  the  right  direction  was  taken  through  a  change  of 
the  law  relating  to  the  collection  of  taxes.  Taxes  in  Xew 
York  City  v.ere  formerly  payable  on  the  first  ^londay  in 
October,  with  the  consequent  loss  of  an  enormous  amount 
of  money  paid  out  as  interest  charges  on  current  loans,  dur- 
ing the  nine  months  from  January  first  to  October  first. 
The  amendment  recently  made  to  the  existing  tax  laws  ad- 
vances the  date  of  collection  from  October  first  to  May  iirst, 
and  introduces  the  policy  of  the  semi-annual  collection, 
which  works  to  the  great  satisfaction  of  the  taxpayers  and 
effects  a  large  saving  in  interest  on  temporary-  loans.  Many 
other  cities  have  adopted  the  same  reform,  appreciating  that 
it  is  alwavs  conducive  to  economv  to  lew  and  to  collect 


34 1  ]  ORIGIN,  CLASSIFICATION,  LIMITS  157 

taxes  as  soon  as  possible  after  the  beginning  of  the  fiscal 
year/ 

II.  Special  Revenue  Bonds. — In  addition  to  the  revenue 
bonds  just  considered,  there  is  another  form  of  temporary- 
indebtedness,,  distinguished  from  the  former  only  in  resi^ect 
to  the  source  from  which  the  money  for  its  liquidation  is 
drawn.  This  is  called  the  special  revenue  bonds.  So  far  as 
the  money  market  is  concerned,  it  amounts  to  the  same 
thing  as  an  ordinary  revenue  bond  or  bill.  It  represents 
payments,  however,  which  are  not  chargeable  to  the  current 
year's  budget.  These  extra-budgetary  expenditures  may 
arise  in  several  ways,  in  the  nature  of  emergencies,  as  fol- 
lows : 

1.  Judgments  and  claims. 

2.  Deficiencies  in  certain  funds. 

3.  Operating  expenses  of  the  Public  Service  Commission, 
first  district. 

4.  Operating  expenses  of  many  of  the  county  offices,  in  ad- 
dition to  the  amounts  in  the  budget. 

5.  Emergency  expenses  of  the  Department  of  Health. 

6.  Emergency  expenses  of  the  District  Attorney's  office. 

7.  Snow  removal  for  the  Department  of  Street  Cleaning  in 
addition  to  amounts  in  the  budget. 

8.  General  appropriations  supplemental  to  the  current  year's 
budget  for  the  various  departments,  limited  to  an  issue  of 
$2,000,000  per  annum. 

The  above  are  some  of  the  recurring  uses  of  special  reve- 
nue bonds.  In  addition  these  bonds  may  be  issued  for 
special  purposes,  as  illustrated  by  the  following  examples : 

I.  Municipal  celebration.  July  4,  1912. 

'  Proceedings,  Seventh  Annual  Convention,  National  Association  of 
Comptrollers  and  Accounting  Officers,  held  at  Buffalo,  N.  Y.,  1912,  pp. 
15-16. 


158  FINANCES  OP  THE  CITY  OF  NEW  YORK  [342 

2.  Board  of  Elections,  deficiency  in  appropriation,  1912. 

3.  Maintenance  of  Williamsburg  Bridge,  191 2. 

4.  Purchase  of  general  supplies,  1912,  Department  of  Edu- 
cation. 

5.  Payment  of  county  charges  and  expenses. 

6.  Deficiency  in  appropriation  for  carting. 

7.  Claims  police  pension  fund — deficiency  in  appropriation, 
1912. 

8.  Purchase,  operation  and  maintenance  of  automobile, 
President  Borough  of  Queens.^ 

In  order  to  show  how  special  revenue  bonds  may  arise 
as  the  result  of  an  emergency,  let  us  suppose  that  there  is 
an  unusual  snow-fall  in  a  certain  year.  If  the  expense  of 
clearing  away  the  snow  is  greater  than  is  provided  for  in 
the  budget,  the  Board  of  Estimate  and  Apportionment,  at 
the  request  of  the  Street  Cleaning  Department,  may  au- 
thorize an  issue  of  special  revenue  bonds  for  this  purpose. 
These  bonds  cannot  be  paid  off  from  the  tax  receipts  of  the 
current  year  and  an  item  is  therefore  inserted  in  the  budget 
for  the  following  year  to  provide  for  them.  On  May  4, 
1913,  the  city  had  about  $8,000,000  of  these  special  revenue 
bonds  outstanding.  Part  of  this  sum  represents  extraordi- 
nary expenditures  in  19 13  which  were  provided  for  in  the 
191 3  budget  and  were  redeemed  from  the  taxes  of  that 
year.  The  rest  represents  extraordinary  expenditures  in 
191 3,  which  have  been  provided  for  in  this  year's  budget 
and  will  be  paid  out  of  this  year's  tax  receipts." 

The  issue  of  special  revenue  bonds  to  provide  for  emer- 
gency cases  has  led  to  the  evil  practice  of  overstating  the 
redemption  charges,  owing  to  the  fact  that  the  former  have 

'  See  leaflet,  A'o  Matter  Who  Is  Elected — No.  12 — Expense  Facts 
Hidden  in  Debt  Redemption  Charges,  published  by  the  New  York 
Bureau  of  Municipal  Research,  Aug.  9,  1913. 

^New  York  Times,  May  4,  1913,  viii,  14,  i. 


-,43]  ORIGIN,  CLASSIFICATION,  LIMITS  159 

been  put  into  the  same  item  as  charges  for  permanent  (jv;bt. 
In  the  three  budgets  voted  by  the  Gaynor  administration, 
over  $20,000,000  of  special  revenue  bonds  were  put  in  as 
debt-service  charges.  In  the  three  corresponding  years  of 
the  preceding  administration,  1907- 1909,  special  revenue 
bonds  constituted  over  $25,000,000  of  the  total  debt  ser- 
vice. "  In  some  years,  more  than  half  of  the  so-called 
charges  for  '  redemption  and  installments  of  city  debt '  was 
really  for  meeting  current  expenses  of  the  preceding  year." 
In  1909,  it  was  $1,172,000  more  than  half.^ 

The  result  of  lumping  together  the  special  revenue  bonds 
redemption  with  the  permanent  debt  redemption,  is  to  pre- 
vent both  the  public  and  the  officials  from  focussing  their 
attention  upon  the  size  of  the  extra-budgetary  expenditures 
made  during  the  year.  Although  these  expenditures  are, 
in  the  nature  of  things,  impossible  to  determine  at  the  time 
the  budget  is  voted,  it  has  l>een  suggested  that  the  Comp- 
troller and  the  Board  of  Estimate  should  at  least  state  defi- 
nitely when  the  budget  it  prepared,  the  amount  spent  for 
each  purpose  for  the  first  three  quarters  of  the  current  year 
and  the  amount  estimated  for  the  balance  of  that  year,  and 
should  show  separately  in  the  budget  the  amount  of  short- 
term  bond  redemption  and  the  purpose  for  which  such  bonds 
were  issued."  This  is  an  important  suggestion,  because  in 
the  past  the  taxpayers  have  been  deceived  by  the  low  bud- 
getary allowances.  For  instance,  a  few  years  ago,  before 
the  installation  of  the  scientific  budget,  almost  one-third  of 
the  expenditures  for  the  Health  Department  was  paid  from 
special  revenue  bonds.  Every  health  project  was  taken  as 
an  emergency  measure  and,  for  the  time  being,  the  budget- 

'  See  a  leaflet,  entitled,  No  Matter  Who  Is  Elected— No.  is— Expense 
Facts  Hidden  in  Debt  Redemption  Charges,"  published  by  the  New 
York  Bureau  of  Municipal  Research,  Aug.  9,  1913. 

'  Ibid. 


l6o  FINANCES  OF  THE  CITY  OF  NEW  YORK  [344 

allowances  for  that  department  were  kept  below  the  normal 
amount.  It  would  undoubtedly  be  a  great  step  forward  in 
the  reform  of  city  financing  to  refuse  the  authorization  of 
special  revenue  bonds  for  purposes  previously  denied  when 
the  budget  was  voted.  A  contingent  fund  should  be  created 
to  supply  the  unforeseen  expenses  omitted  from  the  budget. 
This  would  put  a  stop  to  the  evil  practice  of  meeting  emer- 
gencies by  issuing  short-term  bonds,  costly  in  interest 
charges. 

B.    LONG-TERil    financing:    THE    FUNDED    DEBT 

The  funded  debt  of  the  city  has  grown  up  because  ol  the 
unsound  financial  practice  of  borrowing  on  long  time  for 
the  acquisition  and  construction  of  improvements,  which 
has  been  due  to  the  popular  clamor  for  expensive  improve- 
ments which  shall  entail  no  expense  upon  the  present  tax^ 
payers.  Most  of  the  taxpayers  wish  to  pay  as  little  as  pos- 
sible of  the  tax  burdens  which  should  fall  directly  upon 
them  and  prefer  the  practice  of  having  the  municipality  bor- 
row and  pay  any  amount  of  interest  in  order  to  impose  the 
payments  upon  future  generations.  Anyone  who  advocates 
the  payment  for  improvements  partly  out  of  the  annual  tax 
levies  and  partly  out  of  the  proceeds  of  short-term  bonds 
with  maturities  reasonably  commensurate  ^^^th  the  life  of 
the  improvement  is  sure  to  be  denounced  as  an  enemy  of 
the  common  welfare,  whereas  those  officials,  who  defend 
the  evil  practice  of  charging  the  cost  of  construction  to  the 
long-term  corporate  stock,  are  hailed  as  friends  of  the  com- 
munity.^ 

The  extent  to  which  the  policy  of  charging  the  cost  of 
construction  to  the  long-term  corporate  stock  has  been  car- 

^  See  an  article  on  "  City  Borrowing,"  by  Mr.  Gliffing.  Proceedings, 
Seventh  Annual  Convention,  National  Association  of  Comptrollers  and 
Accounting  Officers,  held  at  Buffalo.  N.  Y.,  1912,  p.  16. 


345]  ORIGIN,  CLASSIFICATION,  LIMITS  l6i 

ried,  is  shown  by  the  fact  that  ckiring  the  period  from  Janu- 
ary I,  1898,  to  June  30,  191 1,  long-term  bonds  of  the  City 
of  New  York  were  issued  for  the  following  purposes : 

Water  Supply   $129,923,568 

Streets  and  Roads  99,111,159 

Schools    93,517,622 

Docks  and  Ferries    82,676,225 

Bridges    78,734,452 

Rapid  Transit  Railroads  7t„i62.t,J!,7 

Public  Buildings  59,008,909 

City  Parks    37,578,461 

Libraries    11,493,400 

Fire   Department    6,049,389 

Police  Department 3,602,984 

Department  of  Health   3,216,809 

Department  of  Street  Cleaning 3,170,541  ^ 

Fortunately  this  eagerness  for  public  improvements  is 
held  in  check  by  the  constitutional  provisions,  limiting  the 
debt-incurring  capacity  of  the  city  to  10  per  cent  of  the  as- 
sessed valuation  of  its  real  property.  We  shall  presently 
see  what  an  important  part  this  constitutional  limitation  has 
played  in  the  city's  financing  and  what  portion  of  the  city's 
debt  is  subject  to  it. 

It  has  l>een  argued  that  the  cost  of  improvements  should 
be  distributed  over  the  number  of  years  for  which  they  are 
of  use  to  the  community.  The  improvement  benefits  the 
community  as  long  as  it  is  useful,  and  might  be  the  cause 
of  its  rapid  growth.  In  such  a  case,  it  is  perhaps  reasonable 
to  apportion  the  cost  over  the  years  benefited.  But  as  a 
general  rule,  such  a  policy  should  be  condemned  as  waste- 
ful and  extravagant,  because  improvements  as  a  whole  con- 
stitute an  annual  recurring  charge  of  substantially  the  same 

'  See  an  article  by  William  A.  Prendergast,  Comptroller  of  the  City 
of  New  York,  in  National  Municipal  Review,  vol.  vi,  no.  2,  April,  1913, 
p.  221.  These  figures  pertain  only  to  permanent  improvements  and 
have  nothing  to  do  with  the  current  cost  of  operation. 


l62  FINA.XCES  OF  THE  CITY  OF  NEW  YORK  [346 

amount,  similar  in  principle  to  the  operating  expenses.  Take, 
for  instance,  the  cost  of  constructing  a  school  house,  say 
$100,000.  A  growing  city  may  build  a  new  school  each  year 
or  two,  and  is  thus  under  the  obligation  of  paying  an  annual 
charge  of  equal  amount  each  year.  The  issue  of  corporate 
stock  to  pay  the  cost  is  no  sound  method  of  equally  appor- 
tioning the  burden  over  the  number  of  years  benefited.  It 
merely  puts  off  the  time  of  payment  and  imposes  the  addi- 
tional and  unnecessary  burden  of  paying  interest  charges, 
ranging  from  50  to  200  per  cent  of  the  principal.  To  put 
it  in  another  form,  if  a  growing  city  is  building  every  year 
or  two  a  new  school,  at  a  cost  of  $100,000,  and  pays  for  it 
by  means  of  50-year  bonds,  instead  of  out  of  current  reve- 
nue, it  will  pay  eventually  $300,000 — $100,000  for  the 
school  and  $200,000  for  interest. 

The  enormous  increase  in  the  amount  paid  for  interest  is 
most  startling  in  the  case  of  macadamized  or  paved  streets. 
The  City  of  New  York  has  actually  been  in  the  habit  of 
selling  50-year  bonds  to  pay  for  ten-year  street  paving, 
which  lasts  often  for  not  more  than  five  years !  Thus,  the 
interest  payment  continues,  even  after  the  streets  have  been 
Avorn  out.  Fortunately,  the  dawn  of  a  brighter  era  of 
financing  has  come  and  legislation  has  been  obtained  to  per- 
mit the  city  to  issue  ten-year  bonds  for  street  paving.  This 
is  certainly  a  notable  step  in  the  right  direction  of  muna- 
cipal  financing.  It  will  also  enable  the  city  to  obtain  more 
margin  for  further  indebtedness  to  finance  abnormally  large 
and  costly  metropolitan  improvements. 

This  change  paves  the  way  for  a  second  but  more  ad- 
vanced step  in  the  reform  of  municipal  financing.  A  10- 
year  street  constructed  at  a  cost  of  $100,000,  if  paid  for 
out  of  50-year  corporate  stock,  would  cost  the  city  at  the 
end  of  fifty  years  about  $300.000 — $100,000  for  the  origi- 
nal cost  and  $200,000  for  interest.     This  would  be  reduced 


347]  ORIGIN,  CLASSIFICATION,  LIMITS  163 

to  $140,000  if  lo-year  bonds  were  issued  in  place  of  50-year 
bonds.  As  street  paving  in  New  York  City  has  become  a 
recurring  bettemient  work,  it  would  be  even  more  reason- 
able to  pay  for  it  out  of  the  annual  tax  proceeds,  because 
such  an  expenditure  is  in  the  nature  of  annual  expense.  The 
next  enlightened  step  would  therefore  be  the  elimination  of 
the  interest  charge  altogether,  so  that  the  expense  for  pav- 
ing each  street  would  be  original  cost  only.^ 

The  greatest  disadvantage  of  financing  municipal  needs 
by  the  issue  of  corporate  stock,  lies  in  the  constant  enlarge- 
ment of  the  percentage  of  the  annual  budget  that  goes  to 
pay  the  debt  service.  Thus,  in  the  year  1898,  of  every  $100 
spent  as  current  cost  of  administration  in  the  City  of  New 
York,  about  $15.09  was  for  interest  and  redemption  of 
debt,  including  the  interest  on  all  the  debt  and  the  redemp- 
tion merely  of  the  long-temi  bonds.  The  redemption  of  the 
short-term  certificates  is  not  included,  because  it  is  not  in 
the  nature  of  debt  service.  This  percentage  rose  from 
15.09  in  1898,  the  first  year  of  the  consolidation,  up  to 
25.94  per  cent  in  1909,  and  26.65  P^'*  cent  in  1910.  It  is 
therefore  important  to  call  public  attention  to  this  feature 
of  municipal  financing,  by  showing  by  significant  lines  of 
cleavage  what  are  the  causes  of  our  expenditures  and  what 
ratios  the  expenditures  l3€ar  to  the  total.  Now  there  is 
something  radically  wrong  in  the  fact  that  out  of  every 
$100  for  current  administration,  the  debt-service  alone  ab- 
sorbs $26.65."  The  ultimate  efifect  of  loading  the  city  with 
such  a  high  debt  service  will  be  the  diminution  of  the  bud- 

'  For  a  more  detailed  statement  on  this  point,  see  article  on  "  City 
Borrowing,"  by  Mr.  Gliffing,  Proceedings,  Seventh  Annual  Convention, 
National  Association  of  Comptrollers  and  Accounting  Officers,  1912, 
pp.  15-16. 

*  Proceedings,  Fifth  Annual  Convention,  National  .\ssociation  of 
Comptrollers  and  Accounting  Officers,  1910,  p.  115. 


1 64  FINANCES  OF  THE  CITY  OF  NEW  YORK  [3,^8 

getary  appropriations  to  take  care  of  the  current  operating 
needs,  so  that  the  city  will  be  practically  forced  to  continue 
the  issue  of  bonds  and  to  put  off  the  day  of  payment  until 
the  time  when  the  annual  taxes  amount  to  such  a  high  tigure 
as  to  be  an  intolerable  burden.  A  great  lesson  can  be 
learned  from  Washington.  D.  C,  which  has  carried  on  its 
beautiful  improvement  work  without  recourse  to  the  prac- 
tice of  issuing  long-time  bonds.  There  are  some  other 
cities  in  the  Union  which  are  in  a  similar  situation.  There 
are  no  protests  against  poor  financing  in  those  cities  because 
their  officials  have  been  able  to  make  the  outlay  for  improve- 
ment an  annual  charge  against  the  budget.^ 

To  make  clearer  the  objection  to  long-term  bonds,  sup- 
pose that  beginning  with  19 14,  the  city  officials  should  ap- 
propriate $20,000,000  for  capital  outlay  and  insert  this  as  a 
new  item  in  the  budget.  This  would  of  course  mean  an  in- 
crease of  that  amount  in  the  tax  revenues  needed  for  that 
year.  In  the  second  year,  however,  there  would  be  a  dimi- 
nution of  about  $1,000,000.  which  would  have  been  needed 
to  pay  the  interest  on  $20,000,000.  had  long-term  bonds 
been  issued.  A  $20,000,000  annual  appropriation  for  public 
improvements  for  a  period  of  twenty  years  would  cost  the 
taxpayers  $400,000,000,  but  it  must  be  remembered  that 
the  city's  debt  would  at  the  end  of  the  twentieth  year  be 
$400,000,000  less  than  it  would  have  been  had  the  improve- 
ments been  financed  by  the  issue  of  corporate  stock.  More- 
over, an  interest  and  sinking-fund  charge  to  the  amount  of 
$226,000,000  w^ould  be  avoided.  On  the  basis  of  4.50  per 
cent,  the  saving  of  interest  to  the  city  W'Ould  increase  from 
$900,000  in  the  first  year  up  to  $45,000,000  in  the  fiftieth 
year,  provided  that  the  fifty-year  bond  issue  is  split  up  into 
fifty  annual  installments  of  $20,000,000  each. 

^  Proceedings,  Seventh  Annual  Convention.  National  Association  of 
Comptrollers  and  Accounting  Officers.  1912.  p.  18. 


349]  ORIGIN,  CLASSIFICATION,  LIMITS  165 

Against  this  proposal  the  argument  is  made  that  it  is  un- 
just to  impose  the  burden  of  financing  public  improvements 
on  the  present  generation,  since  the  streets  and  other  forms 
of  improvement  benefit  the  future  generations  to  no  less 
extent.  It  is  this  argument  which  has  sometimes  been  ad- 
vanced to  justify  the  city's  borrowing  policy,  in  disregard 
of  the  fact  that  in  the  past,  short-lived  improvements  have 
often  been  paid  for  out  of  the  proceeds  of  long-term  bonds. 
But  whatever  its  theoretic  justification,  the  borrowing 
policy  of  the  past  cannot  be  continued  in  the  City  of  New 
York.  The  question  must  be  dealt  with  in  the  light  of  the 
actual  circumstances  of  this  great  city.  In  a  small  commu- 
nity, where  the  construction  of  water  works  makes  an  ex- 
ceptional demand  for  funds,  it  might  be  advisable  to  appor- 
tion the  burden  over  a  number  of  years  by  issuing  long-term 
bonds,  instead  of  increasing  the  current  tax-levy.  This  ex- 
ample cannot  be  followed  by  New  York,  for  the  reason  that 
the  demand  for  such  funds  is  a  continuous  one.  For  the 
past  ten  years,  the  corporate  stock  in  New  York  averaged 
$61,530,000,  and  we  cannot  in  the  near  future  expect  any 
appreciable  diminution  in  the  demand  for  public  improve- 
ments. Added  to  this  $61,530,000  expended  for  improve- 
ments, is  the  amount  of  fixed  charges  aggregating  nearly 
as  much  more — the  estimated  interest  and  sinking-fund 
charges  for  191 3  being  approximately  $55,000,000.^  These 
debt  charges  would  be  greatly  reduced  if  future  bond  issues 
were  cut  down.  The  assumed  budgetary  addition  of  $20,- 
000.000  would  therefore  be  offset  by  the  savings  in  interest 
and  sinking-fund  charges. 

The  municipal  reformers,  though  impatient  with  the  un- 
scientific method  of  financing  the  city's  public  improve- 
ments, are  pleased  with  the  change  made  in  the  authoriza- 

'  See  a  leaflet,  No  Matter  Who  Is  Elected— No.  25,  Nov.  8,  1913,  prb- 
lished  by  New  York  City  Bureau  of  -01-6  "dd  'qoJEasa-jj  iBdpiunj^ 


1 66  FINANCES  OF  THE  CITY  OF  NEW  YORK  [3^0 

tions  of  corporate  stock.  Prior  to  1910,  the  Board  of  Esti- 
mate and  Apportionment  had  no  comprehensive  plan  for 
the  consideration  and  determination  of  the  various  activities 
of  the  city  requiring  the  issue  of  corporate  stock  to  meet 
the  capital  outlay.  Stock  was  therefore  authorized  and 
issued  piecemeal  whenever  a  new  measure  was  advocated 
by  a  departmental  head.  This  method  of  financing,  to- 
gether with  the  lack  of  careful  investigations  following  the 
recommendation  made  by  the  departmental  head,  was 
largely  responsible  for  the  excessive  allowances. 

Once  upon  a  time,  city  contracts  were  practically  synony- 
mous with  that  black  word — graft.  "  In  too  many  instances 
there  has  been  a  very  vast  difference  between  the  first  esti- 
mated cost  and  the  final  cost  of  improvement  discussed,  a 
discrepancy  caused  by  the  prevalence  of  the  '  guess  esti- 
mate '."  Under  the  old  method  of  appropriating  money 
for  public  works,  a  plan  for  a  hospital,  a  bridge,  or  a  library 
was  submitted  by  a  commissioner  with  a  rough  estimate  of 
its  approximate  cost.  The  requests  for  public  funds,  which 
were  referred  to  the  comptroller  and  approved  by  him  alone 
were  made  at  irregular  times.  Any  additional  money  that 
was  needed  to  complete  the  work  or  to  extend  it  beyond 
the  original  scope,  was  asked  for  and  granted  in  the  same 
way,  these  additions  often  aggregating  more  than  100  per 
cent  over  the  original  guess  estimate.  The  following  table 
contains  a  few  startling  examples  of  these  guess  estimates 
and  their  additions. 

Compfettn  Nature  of  Structure  Original  Estimate       Finally  Paid    ^^^^^^^ 

1909  Manhattan   Bridge    $15,800,000  $26,500,000  67.8 

1909  Queensboro   Bridge    12,500.000  18,100,000  44.4 

1906  Hall   of   Records    2,500,000  5,970,000  113.8 

191 1  New  York  Public  Library...  8.446,600  9.059,700  7.2 

A  leaflet,  published  July  6,  1913,  by  Bureau  of  Municipal  Research, 
entitled,  No  Matter  Who  Is  Elected,  No.  6. 


.'ll  ORIGIN,  CLASSIFICATION,  LIMITS  167 

The  evil  results  of  such  a  method  of  appropriating  public 
funds  for  public  works  are : 

(i)  "An  open  door  to  graft  and  dishonesty."  Con- 
tractors send  in  low  bids  in  order  to  get  the  contract  and 
then  trust  to  "  pull  "  to  help  them  get  additional  appropria- 
tions. 

(2)  Waste  of  material  with  impunity  because  more 
money  can  easily  be  obtained.^ 

In  1 9 10,  the  Board  of  Estimates  adopted  the  corporate 
stock  budget,  based  on  complete  examination  of  corporate 
stock  estimates  for  all  purposes  covering  the  ascertainment 
of  amounts  necessary  to  complete  the  work  undertaken,  the 
cancellation  of  unnecessary  authorization  or  balances  and 
the  determination  of  new  amounts  required.  "  This  enabled 
the  board  to  know  the  exact  obligations  of  and  the  amounts 
due  to  each  branch  of  the  city  administration,"  and  to  con- 
sider each  proposed  new  public  improvement  with  refer- 
ence to  the  other  improvements.  Departments  to  which  an 
authorization  has  been  made  at  the  budget  time  are  not  ex- 
pected to  ask  for  and  to  receive  any  further  amount  during 
the  year,  except  in  cases  of  emergency.' 

Thus,  instead  of  one  official — the  comptroller — deciding 
upon  the  advisability  of  these  expenditures  involving  the 
city  in  the  outlay  of  millions  of  dollars,  a  committee  of 
three  composed  of  the  Comptroller,  the  President  of  the 
Board  of  Aldermen  and  the  President  of  the  Borough  of 
Manhattan,  investigates,  considers  and  recommends  the  cor- 
porate stock  authorizations  for  permanent  improvements. 
The  best  engineers  and  architects  employed  by  the  city  are 
requested  to  give  their  suggestions  and  opinions  in  regard 
to  the  original  plans.     The  estimates  made  by  the  depart- 

1  No  Matter  Who  Is  Elected,  No.  6. 

*  See  Municipal  Year  Book  of  the  City  of  Neiv  York,  1913,  pp.  39-41- 


1 68  FINANCES  OF  THE  CITY  OF  NEW  YORK  [352 

ment,  together  with  the  prices  asked  by  the  contractors,  are 
subjected  to  a  challenge  by  the  city.  Specifications  that 
show  favor  to  particular  patents  or  individual  bidders  are 
detected  and  rejected. 

Corporate  stock  appropriations,  which  are  restricted  to 
certain  particular  public  improvements,  are  now  segregated 
in  the  same  way  as  the  tax  budget  is  segregated,  and  may 
be  used  only  for  the  purposes  therein  specified. 

•    C.    THE  DEBT  LIMIT 

In  view  of  the  prominent  part  played  by  the  constitu- 
tional limitation  on  municipal  indebtedness,  it  is  important 
for  us  to  examine  carefully  into  its  genesis  and  operation 
during  recent  years.  The  first  suggestions  looking  toward 
a  restriction  of  the  municipal  indebtedness  were  presented 
to  the  constitutional  convention  of  the  State  of  New  York 
of  1846.  But  the  convention  did  nothing  beyond  giving 
general  injunction  to  the  legislature  to  restrain  the  munici- 
palities in  the  exercise  of  their  borrowing  power.  The  legis- 
lature promptly  acted  upon  the  injunction,  but  the  law 
passed  by  it  was  not  strictly  enforced.  The  constitutional 
commission  of  1872  gave  serious  consideration  to  the  entire 
subject  of  municipal  debt.  A  special  committee  in  its  re- 
port says, 

The  time  has  come,  when  it  is  absolutely  necessary  to  impose 
some  restraint  upon  the  power  of  municipalities  to  incur  debt, 
for  if  that  power  is  continued  in  the  future  as  it  has  been  in 
the  past,  as  shown  by  the  statistics  herewith  submitted,  the 
result  will  be  in  the  highest  degree  disastrous. 

The  special  committee  presented  to  the  constitutional  com- 
mission in  connection  with  its  report  a  section  prohibiting 
cities,  towns  and  villages  from  incurring  debt  beyond  10 
per  cent  of  the  assessed  valuation  of  their  real  property. 


353]  ORIGIN,  CLASSIFICATION,  LIMITS  i^ 

The  attempt,  however,  to  insert  this  section  into  the  consti- 
tution as  proposed  by  the  commission  was  not  crowned  with 
success.  Later,  various  other  attempts  were  made  to  impose 
a  restraint  upon  the  debt-incurring  power  of  the  municipali- 
ties, but  none  of  them  succeeded  in  incorporating  a  restric- 
tive provision  in  the  constitution.  It  was  not  until  1882 
that  an  amendment  restricting  the  amount  of  municipal  in- 
debtedness was  introduced  into  the  legislature  and  passed 
both  houses.  It  was  repassed  in  1884,  adopted  by  the  peo- 
ple by  a  unanimous  vote  and  went  into  effect  January  i, 
1885.  It  was  provided  that  no  city  of  over  100,000  in- 
habitants, and  no  county  containing  such  a  city  may  become 
indebted  beyond  10  per  cent  of  the  assessed  valuation  of 
real  estate  within  its  limits.  The  issue  of  revenue  bonds  in 
anticipation  of  the  collection  of  taxes  is  not,  however,  within 
the  contemplation  of  the  law.  Similarly,  the  borrowing  of 
money  to  provide  a  supply  of  water  for  a  city  was  exempt 
from  this  limitation,  provided  the  bonds  issued  did  not 
have  a  longer  term  than  twenty  years. 

The  above  amendment  remained  in  force  until  1894, 
when  certain  modifications  were  made.  While  it  applied 
only  to  cities  of  100,000  inhabitants,  and  to  counties  con- 
taining such  cities,  the  constitution  of  1894  extended  the 
same  limitation  to  all  counties  and  cities  in  the  State.  The 
provision  for  the  exclusion  of  revenue  bonds  was  also 
amended  so  as  to  require  the  counties  and  cities  to  include 
them  if  they  are  not  retired,  within  five  years  from  the  date 
of  their  issue.  "  Bonds  issued  to  provide  for  the  supply  of 
water  and  any  debt  incurred  by  any  portion  or  part  of  a 
city  shall  be  included  in  ascertaining  the  power  of  the  city 
to  become  otherwise  indebted." 

The  charter  commission  of  1900  recommended  that  the 
debt  limit  be  so  amended,  as  to  provide  that  after  January 
I,  1904,  bonds  issued  for  water  supply  by  New  York  City 


I-O  FINANCES  OF  THE  CITY  OF  NEW  YORK  [354 

should  not  be  included  in  ascertaining  the  city's  power  to 
become  otherwise  indebted.  Otherwise,  the  outlay  of  the 
vast  amount  of  money  that  will  be  borrowed  for  this  pur- 
pose would  check  the  extension  of  other  needed  improve- 
ments. For  financial  and  sanitary  reasons,  it  was  deemed 
advisable  and  necessary  that  the  water  bonds  should  not  be 
counted  in  the  computation  of  the  city's  capacity  to  incur 
debt  for  other  purposes.  On  the  basis  of  this  recommenda- 
tion, an  amendment  was  adopted  in  November,  1905.  A 
similar  demand  was  made  by  some  of  the  cities  of  the  sec- 
ond class,  and  the  above  exemption  was  accordingly  ex- 
tended to  them  by  an  amendment  adopted  in  November, 
1907. 

One  purpose  of  the  constitutional  provision,  which 
should  be  more  clearly  stated,  is  to  prevent  the  muni- 
cipalities from  devoting  their  borrowed  money  to  works 
that  produce  no  revenue  at  all.  The  interest  charges 
have  increased  at  a  rapid  rate,  and  but  for  this  limi- 
tation the  taxpayers  of  future  generations  would  be 
under  obligation  to  meet  enormous  interest  and  sinking 
fund  requirements.  The  constitutional  limitation  of  muni- 
cipal indebtedness  to  10  per  cent  of  the  assessed  valua- 
tion of  its  real  estate  puts  a  direct  check  on  the  increase  of 
this  burden.  To-day  the  legislature  clearly  sees  the  distinc- 
tion between  the  non-revenue-producing  enterprises  and  the 
revenue-producing  enterprises.  Millions  of  dollars  have 
now  been  invested  in  undertakings  which  not  only  are  self- 
supporting,  but  also  yield  sufficient  income  to  pay  the  cur- 
rent expenses  of  maintenance  and  operation,  as  well  as  the 
interest  and  sinking  fund  charges.  Perhaps  an  additional 
profit  may  be  made  after  all  the  expenses  are  deducted  from 
the  gross  receipts.  Such  an  investment  is  not  a  burden  upon 
the  taxpayers,  for  it  does  not  call  upon  them  to  pay  an  an- 
nual interest  charge,  nor  to  create  a  sinking  fund  for  the 


355 J  ORIGIN,  CLASSIFICATION,  LIMITS  lyi 

redemption  of  the  debts  out  of  the  annual  tax  levy.  It  is 
because  water  works  are  self-sustaining,  that  the  bonds 
issued  to  provide  for  a  supply  of  water  have  been  made  ex- 
empt from  the  lo  per  cent  limit. ^ 

D.    COMPUTATION   OF  THE   CITY  DEBT 

As  the  constitution  limits  the  city's  debt  to  lo  per  cent  of 
the  assessed  valuation  of  its  real  estate,  the  next  question 
to  ask  is  what  is  the  city's  debt  or  what  should  be  computed 
to  be  the  city's  debt.  This  present  section  undertakes  tO' 
answer  this  question. 

It  was  only  four  years  ago  that  the  exact  amount  of  the 
city's  indebtedness  was  determined,  although  the  constitu- 
tion has  for  many  years  limited  it  to  lo  per  cent  of  the 
assessed  valuation  of  its  real  estate.  Until  then  "the  bor- 
rowing capacity  of  the  city  was  high  or  low  according  to 
the  method  used  by  the  computer."  Some  said  that  the  bor- 
rowing margin  was  $3,000,000;  others  that  the  total  debt 
had  exceeded  the  debt  limit  by  $6,000,000,  and  still  others 
that  it  could  borrow  $100,000,000  more.  This  diversity  of 
guesses  proved  a  stumbling-block  to  all  movements  for 
public  improvements  and  brought  up  the  all-important  ques- 
tion of  determining  once  for  all  what  the  total  indebtedness 
is,  or  what,  if  any,  deductions  should  be  made  therefrom." 
In  a  taxpayers'  suit  ^  it  was  strenuously  contended  that  in 
computing  the  indebtedness  of  a  city  within  the  meaning  of 
the  provision  of  the  constitution,  it  was  incorrect  to  include 
special  franchises  as  a  part  of  the  real  estate  which  is  valued 

*  See  Appendix  I  on  "  The  Debt  Limit,  in  Its  Relation  to  Subway 
Construction,"  in  the  Annual  Report  (1907)  of  the  New  York  Public 
Service  Commission  for  the  first  district,  vol.  i,  pp.  437-448. 

'  See  a  pamphlet  entitled.  Six  Years  of  Mnnicipal  Research  for  New 
York  City,  Bureau  of  Municipal  Research,  1906-11,  p.  14. 

*  Levy  v.  McClellan,  196  >,.  Y..  178.  Oct.,  1009. 


172  FINANCES  OF  THE  CITY  OF  NEW  YORK  [3-5 

for  assessment  purposes.  The  language  of  the  constitution 
is,  however,  explicit  that  "  the  assessed  valuation  of  the  real 
estate  '  must  be  taken  '  as  it  appeared  on  the  assessment 
rolls  ",  and  it  was  shown  to  the  court  that  the  special  fran- 
chise entered  into  the  valuation  of  real  estate,  as  it  ap- 
peared on  the  assessment  rolls.  These  special  franchises  are 
rights  or  privileges  of  a  public  nature,  the  exercise  of  which 
is  permitted  under  grants  from  the  State  to  corporations, 
and  the  legislature,  in  the  general  tax  law,  has  classified  them 
as  real  estate,  and  they  are  treated  as  inseparable  from  real 
property  in  their  enjoyment.  The  article  of  the  constitution 
must  therefore  be  deemed  to  comprehend  within  the  term 
real  estate  all  properties  which  are  made  taxable  as  such  by 
valid  statutes. 

As  to  what  should,  and  what  should  not,  be  considered  as 
the  city's  debt,  a  number  of  questions  were  finally  deter- 
mined by  the  Court  of  Appeals  in  1909,  as  a  result  of  the 
Comptroller's  opposition  to  the  approval  of  contracts  for 
the  Fourth  Avenue  Subway.  All  the  parties  to  the  suit,  in- 
cluding the  referee,  and  the  principal  witnesses,  welcomed 
the  questions  and  facts  submitted  by  the  New  York  Bureau 
of  Municipal  Research.  A  memorandum  of  matters  relat- 
ing to  New  York  City's  debt,  which  suggested  the  necessity 
either  for  judicial  ruling  or  legislation,  proposed  no  less 
than  forty-three  alternatives.  The  detailed  arguments  were 
submitted  later  in  "  New  York  City's  Debt :  Facts  and  Laws 
Relating  to  the  Constitutional  Limitation  of  New  York 
City's  Indebtedness."  All  of  the  forty-three  points  men- 
tioned in  the  bureau's  brief  were  taken  up  and  settled  by 
the  Court  of  Appeals  in  a  decision  rendered  in  October, 
1909  (196  New  York,  178).  Several  questions,  however, 
which  are  still  in  doubt,  were  not  answered  by  the  court, 
because  the  litigants  either  failed  to  present  the  facts  to  the 
court  in  these  respects,  or  failed  to  present  them  with  sufifi- 


357]  ORIGIN,  CLASSIFICATION,  LIMITS  173 

cient  clarity.  No  one  can  therefore  assert  that  all  the  ques- 
tions as  to  the  constitutional  indebtedness  of  the  city  have 
even  yet  been  settled,  but  it  is  safe  to  say  that  the  margin  of 
doubt  has  been  reduced  to  a  minimum. 

To-day,  in  the  computation  of  New  York  City's  funded 
debt,  the  following  classes  of  municipal  borrowings  are  ex- 
cluded : 

(a)  The  revenue  bonds  issued  in  anticipation  of  taxes 
to  l>e  collected  in  the  year  when  such  bonds  are  issued,  and 
special  revenue  bonds  issued  to  meet  expenditures  not  pro- 
vided for  in  the  budget  of  the  current  year,  and  which  are 
redeemable  out  of  the  tax  levy  for  the  year  succeeding  their 
issue.  But  revenue  bonds  not  redeemed  within  five  years 
from  the  date  of  their  issue  are  included.  It  is  not  essen- 
tial to  the  exclusion  of  the  revenue  bonds  from  the  compu- 
tation of  the  city's  net  funded  indebtedness  that  they  should 
have  been  issued  during  the  year  when  the  taxes,  against 
which  they  are  issued,  became  payable,  provided  that  when 
issued,  they  represented  those  taxes,  within  the  unpaid 
amount  of  the  levy  and  were  payable  from  the  proceeds  of 
their  collection.  Neither  the  constitution  nor  the  charter 
fixed  the  time  for  issuing  them.  That  is  a  matter  left  to 
the  discretion  of  the  comptroller,  to  be  governed  in  its  ex- 
ercise by  the  city's  needs  and  the  amount  of  the  particular 
years  uncollected  taxes. 

(b)  The  county  bonds  issued  prior  to  the  consolidation 
of  $19,698,222.48/  on  the  theory  that  such  obligations 
should  not  embarrass  Greater  New  York  in  the  extension  of 
its  improvements.  The  provision  excluding  the  county 
bonds  from  the  computation  of  the  city's  net  indebtedness 
was  made  in  1894,  providing  that  whenever  the  boundaries 

'  See  p.  16  in  a  pamphlet  entitled,  Cost  of  Government  in  New  York 
City,  by  Mr.  Henry  Bruere,  Director  of  the  New  York  Bureau  of 
Municipal  'Research,  1913. 


174  FINANCES  OF  THE  CITY  OF  NEW  YORK  [3^8 

of  any  city  are  the  same  as  those  of  a  county,  the  power  of 
the  county  to  become  indebted  shall  cease.  Owing  to  the 
creation  of  Greater  New  York,  this  provision  was  altered 
in  1899  to  apply  to  counties  included  within  the  boundaries 
of  a  city,  but  the  debt  of  the  county,  heretofore  existing,  is 
not  to  be  reckoned  as  the  city's  debt. 

(c)  The  debt  contracted  since  January  i,  1904,  to  pro- 
vide for  the  water  supply  for  the  city,  aggregating  $145,- 
512.393.60.^  This  deduction  is  based  on  the  theory  that 
these  bonds  are  payable  out  of  the  income  derived  from  the 
sale  of  water. 

(d)  The  indebtedness  incurred  for  transit  and  stock  in- 
vestments of  $1 17,425,778.73,  declared  by  the  Appellate  Di- 
vision to  be  self-sustaining  under  the  constitutional  amend- 
ment of  1909. 

(e)  Stocks,  bonds  and  cash  held  by  the  sinking  fund. 

(f)  The  annual  sinking  fund  installment  included  in  the 
budget  for  the  current  year. 

(g)  Bonds  payable  in  the  current  year,  provision  for 
which  has  been  made  in  the  current  budget. 

(h)  Cash  in  the  treasury  from  unallotted  proceeds  of 
bonds  and  cash  on  hand  applicable  to  the  discharge  of  con- 
tract liabilities. 

(i)  Unliquidated  and  disputed  claims  pending  against 
the  city."  So  far  as  these  may  be  ultimately  reduced  to 
judgment,  the}-  will  be  payable  from  the  proceeds  of  special 
revenue  bonds,  which  do  not  enter  into  the  constitutional 
purview  as  existing  indebtedness. 

The  following  classes  of  bonds  are  included  in  the  compu- 
tation of  the  city's  debt  : 

(A)  Corporate  stock  and  other  long-term  bonds  issued 
to  provide  funds  for  future  improvements. 

1  Cost  of  Govermnent  in  New  York  City,  p.  16. 

'  Municipal  Year  Book  of  the  City  of  Nezv  York,  1913,  pp.  33-34. 


"59]  ORIGIN,  CLASSIFICATION,  LIMITS  1 75 

(B)  Assessment  bonds  issued  by  the  city  to  provide 
funds  for  public  improvements,  such  as  the  regulating, 
grading,  and  paving  of  streets,  the  building  of  sewers,  etc. 
The  cost  of  this  work  is  divided  between  the  city  and  the 
property  owners  benefiting  by  the  improvements.  The  hold- 
ers of  these  bonds  have  recourse  to  the  general  credit  of 
the  city  and  their  claims  against  the  city  are  not  restricted 
to  any  special  fund  created  by  the  payment  of  assessment. 
For  this  reason,  assessment  bonds  are  considered  an  indebt- 
edness and  included  in  the  computation  of  the  city  debt. 

(C)  General  fund  bonds  representing  the  payment  of 
the  excess  revenues  of  the  sinking  fund  created  for  the  re- 
demption of  the  city  debt  No.  i  with  the  general  fund  for 
the  reduction  of  taxation.  Provision  is  made  for  the  can- 
cellation of  the  general  fund  bonds,  after  the  year  1929, 
provided  that  they  are  then  still  held  by  the  sinking  fund  as 
its  assets  are  not  required  to  meet  any  of  its  obligations. 

(D)  Revenue  bonds  outstanding  for  five  years. 

(E)  It  is  the  practice  of  the  Department  of  Finance  to 
include  as  net  contract  liability  the  unpaid  portion  of  the 
certified  and  registered  contracts  payable  from  corporate 
stock,  special  revenue  bonds  and  assessment  bond  funds, 
less  the  amount  of  cash  balances  in  these  funds,  against 
which  contracts  are  registered.  Contract  liability  for  water 
purposes,  excluding  that  portion  which  has  been  issued  since 
January  i,  1904.  is  included. 

(F)  Liability  for  open  market  orders  and  lands  taken  by 
condemnation. 

In  regard  to  the  open  market  orders,  the  practice  of  the 
Department  of  Finance,  before  1909,  was  to  take  no  cog- 
nizance of  the  outstanding  unpaid  open  market  orders 
chargeable  against  corporate  stock  fund.  Inasmuch  as  an 
actual  liability  exists  by  reason  of  the  issuance  of  open 
market  orders,  this  indebtedness  should  be  included  in  as- 
certaining the  net  contract  liability. 


176  FINANCES  OF  TFIE  CITY  OF  NEW  YORK  [360 

The  land  liability  consists  of  the  amount  owing  by  the 
city  to  the  owners  of  private  property  taken  for  public  use. 
The  amount,  with  interest,  is  approximated  by  taking  the 
assessed  valuation  of  the  property.  By  law,  the  owners 
are  entitled  to  recover  the  value  of  the  land,  with  interest, 
from  the  city  in  which  has  become  vested  the  title  and 
possession,  upon  final  proceedings  taken  by  the  municipal 
authorities  looking  to  the  acquisition  of  the  land.^ 

E.    THE  DEBT-INCURRING   POWER   OF  THE   CITY   ON   JANUARY 

2.    I914 

The  debt-incurring  power  of  the  city  on  January  2,  1914, 
was  $51,373,749.62,  but  in  addition  to  this  there  were  com- 
mitments consisting  of  land  and  contract  liability,  which 
had  already  been  charged  against  the  city's  borrowing 
capacity,  amounting  to  $146,497,112.49.  The  total  of  these 
two  amounts,  $197,870,862.11,  represents  the  amount 
which  the  city  could  legally  borrow  upon  its  bonds  or  other 
evidences  of  indebtedness  before  its  legal  borrowing  power 
within  the  constitutional  limit  is  exhausted. 

The  debt-incurring  power  of  $51,373,749.62,  which  is  the 
legal  limit,  may  be  used  for  any  purpose  the  city  officials 
may  decide  upon,  without  regard  to  the  fact  that  the  gov- 
ernment has  already  made  certain  comimitments,  reserva- 
tions, or  authorizations  against  nearly  three-fourths  of  the 
total  sum.  The  policy  of  ignoring  commitments  and  au- 
thorizations, provided  no  contracts  had  actually  been  regis- 
tered against  them,  was  followed  by  administrations  prior 
to  1910,  and  was  responsible  for  much  of  the  financial  con- 
fusion and  over-expenditure  of  the  city.  It  was  prevented 
by  the  introduction  and  operation  of  a  corporate  stock  bud- 
get which  regards  any  authorization  made  against  the  legal 

•  See  a  memorandum  of  matters  relating  to  New  York  City's  debt 
by  Bureau  of  Municipal  Research,  Sept.,  1908.  pp.  3-4. 


o5i]  ORIGIN,  CLASSIFICATION,  LIMITS  177 

debt-limit  as  an  obligation  of  the  city,  no  matter  whether  a 
contract  has  been  registered  against  it  or  not,  in  just  the 
same  way  that  a  bank  would  charge  against  a  depositor's 
account  the  amount  of  any  check  he  may  have  had  certified, 
whether  that  check  had  been  presented  for  payment  or  not. 
This  new  policy  has  effected  a  large  saving  in  expenditure 
and  has  enabled  its  officials  better  to  understand  the  real 
financial  condition  of  the  municipality. 

In  accordance  with  this  policy,  the  legal  debt-limit  of  $51,- 
373,749.62  is  now  avilable  for  contract  for  the  following 
general  purposes:  rapid  transit  expenditures,  $2,103,679.42; 
dock  improvements,  $10,641,248.46,  of  which  $3,782,503.81 
has  been  specifically  authorized,  leaving  $6,858,744.65  of 
unreserved  margin  for  new  authorization  for  dock  improve- 
ment; various  other  municipal  purposes,  $22,049,187.73. 
This  leaves  an  unreserved  margin  of  $16,579,634.01  for 
any  uses  to  which  the  Board  of  Estimate  may  desire  to 
apply  it.^ 

'  See  the  communication   from   Comptroller   Prendergast  to   Mayor 
Mitchel,  Jan.  2,  1914,  pp.  1-4. 


CHAPTER  VII 

The  City  Bonds 
a.  new  york  city  bonds  preferred  by  investors 

New  York  City  bonds  are  popular  with  conservative  in- 
vestors because  they  look  for  absolute  safety  of  investment, 
and  this  New  York  City  bonds  amply  afford.  Indeed,  these 
bonds  are  so  popular  that  the  buyers  are  even  willing  to  sac- 
rifice some  of  their  income  in  order  to  secure  them.  United 
States  government  bonds  are,  of  course,  more  secure  than 
New  York  City  bonds,  but  since  the  yield  is  hardly  more 
than  2  per  cent,  even  the  most  conservative  investor  does 
not  consider  it  attractive.  The  large  majority  of  the  United 
States  government  bonds  are  held  by  the  national  banks,  as 
a  basis  for  circulating  notes. 

State  bonds  owe  their  value  more  to  the  integrity  of 
the  issuer  than  municipal  bonds  for  the  reason  that  any 
State  may  repudiate  its  obligations.  There  is  no  law  to 
compel  them  to  pay  their  debts.  The  Constitution  of  the 
United  States  makes  them  immune  from  prosecution. 
The  eleventh  amendment  of  that  Constitution  provides 
that  "  the  judicial  power  of  the  United  States  shall 
not  be  construed  to  extend  tO'  any  suit  in  law  or  equity 
commenced  or  prosecuted  against  any  of  the  United 
States  by  citizens  of  another  State  or  by  citizens  or  subjects 
of  any  foreign  State."  Under  this  amendment,  the  immu- 
nity of  any  State  from  prosecution  for  fraudulent  acts  is 
perfect,  and  a  number  of  States  have  availed  themselves  of 
it  at  dififerent  times  and  for  different  reasons.  Following 
the  panic  of  1837,  during  the  period  of  severe  depression, 
Mississippi,  Florida,  i\labama,  North  Carolina,  South  Caro- 
178  [362 


263]         CITY  BONDS  PREFERRED  BY  INVESTORS  lyg 

line,  Georgia,  Louisiana,  Arkansas,  Tennessee,  Minnesota, 
Michigan  and  Virginia  repudiated  their  debts/  Then,  after 
the  Civil  War,  many  cases  of  repudiation  were  heard  of  in 
the  South.  From  1870  to  1884,  nine  Southern  States  declared 
themselves  unable  to  satisfy  their  obligations.  Perhaps 
these  State  bonds  will  some  day  be  paid  when  the  Southern 
States  are  confronted  with  the  same  big  problems  of  muni- 
cipal improvements  as  the  Northern  States  and  required  tO' 
raise  money  to  pay  for  them.  In  order  to  sell  the  new 
bonds,  it  may  seem  good  policy  to  satisfy  the  old  creditors. 
It  is  only  by  discharging  their  old  debts  that  the  Southern 
States  can  improve  their  credit  standing  and  be  in  a  position 
to  dispose  of  their  bonds  not  far  below  par. 

When  we  come  to  the  bonds  issued  by  the  City  of  New 
York,  or  any  other  political  subsidiary  of  the  State,  such  as 
cities,  townships,  counties,  etc.,  we  face  a  very  different 
situation.  The  payment  or  repudiation  of  a  debt  is  not  an 
optional  business  with  New  York  City  or  any  other  city  in 
the  Union.  Every  obligation  is  a  secured  obligation,  for 
there  is  an  absolute  guaranty  attached  to  every  issue  of 
municipal  or  county  bonds.  The  explanation  of  this  differ- 
ence is  found  in  the  fact  that  the  municipalities  and  counties 
do  not  enjoy  the  same  immunity  as  the  State.  They  are 
subject  to  the  jurisdiction  of  the  courts,  like  any  citizen  or 
business  corporation  of  the  State. 

The  security  back  of  a  New  York  City  bond  is  twofold: 
( 1 )  the  property  not  used  for  governmental  purposes, 
which  the  city  may  own  and  which  can  be  sold  under  exe- 
cution in  satisfaction  of  a  judgment,  and  (2)  the  obligation 
of  the  city  officers,  when  ordered  to  do  so  by  the  court,  to 
levy  taxes  for  the  payment  of  principal  and  interest  of  the 
city's  debts. 

New  York  City  bonds,  like  any  other  municipal  bonds, 

'  Scott,  Repudiation  of  State  Debts. 


l8o  FINANCES  OF  THE  CITY  OF  NEW  YORK  [364 

differ  from  the  bonds  of  private  corporations  in  that  the 
issue  must  be  in  strict  conformity  with  the  provisions  of 
the  law.  The  object  of  putting  legal  restrictions  upon  such 
issue  is  to  guard  against  fraud  and  misuse  of  borrowing 
power.  The  first  important  restriction  is  that  the  city  is 
not  allowed  to  incur  debt  in  aid  of  any  private  railroad  or 
other  outside  enterprise.  The  proceeds  of  the  issue  must 
be  used  for  the  benefit  of  the  community.  The  second  im- 
portant restriction,  as  pointed  out  in  the  preceding  chapter, 
is  the  limitation  placed  upon  the  extent  or  amount  of  debts, 
equal  to  10  per  cent  of  the  assessed  valuation  of  the  city's 
real  estate.  Absolute  care  is  taken  to  secure  complete  pub- 
licity. The  law  requires  that  the  bonds  should  be  awarded 
to  the  highest  bidders.  For  this  reason,  competitive  bids 
are  invited,  accompanied  by  certified  checks  to  substantial 
amounts  as  evidence  of  good  faith.  In  other  words,  the  in- 
vestor in  New  York  City  bonds  is  protected  by  the  State  in 
every  possible  way.  against  excessive  and  illegal  issues. 
But  these  legal  restrictions,  while  protecting  the  investor  in 
every  possible  way,  also  place  upon  him  the  responsibility 
for  avoiding  buying  New  York  City  bonds  illegally  issued, 
although  such  bonds  have  not  yet  been  sold.  In  this  respect. 
New  York  City  bonds,  and  other  municipal  bonds,  are  dif- 
ferent from  railroad  bonds,  the  innocent  investor  in  which 
may  be  protected  by  law  when  he  does  not  know  that  the 
charter  provisions  and  the  by-laws  of  the  company  have  been 
violated.  The  reason  is  simple.  No  investor  is  supposed  to 
have  a  knowledge  of  the  internal  arrangements  of  the  com- 
pany. With  a  municipal  bond  like  that  of  New  York  Citv' 
the  case  is,  however,  different.  Its  issue  must  be  made 
under  a  legal  procedure,  a  departure  from  which  makes  it 
illegal.  The  laws  must  be  strictly  complied  with  and  every- 
body is  supposed  to  have  a  knowledge  of  them.  If  he  is 
careless,  his  bonds  may  be  declared  invalid.    This  does  not 


365]    ^^TY  BONDS  PREFERRED  BY  INVESTORS  igi 

mean  that  he  will  lose  all  he  has  invested.  He  can  still  fall 
back  on  the  good  faith  of  the  city,  estimating  the  bonds  at 
their  problematical  value.  But  the  trouble  is  that  when  the 
bonds  have  been  declared  illegal,  it  is  very  difficult  to  restore 
the  principal  in  a  legal  way. 

For  this  reason  the  bond  house  purchasing  a  portion  of 
an  issue,  concentrates  its  investigation  upon  the  legal  char- 
acter of  the  bonds.  Of  course,  it  takes  into  account  many 
other  factors,  such  as  the  assets  of  the  city,  the  prosperity 
of  the  people,  etc.  But  its  chief  concern  is  with  the  legality 
of  an  issue.  It  depends  entirely  upon  the  advice  of  the  legal 
experts  it  can  secure.  On  the  basis  of  their  advice,  the 
bonds  are  sold  to  the  public  which  buys  them  with  perfect 
confidence  in  their  legality.^ 

As  indicated  above,  the  safety  of  New  York  City  bonds 
also  lies  in  the  general  understanding  that  they  are  secured 
by  the  pledge  of  taxes  and  revenues  of  the  city.  Taxes  are 
preferred  claims  and  enjoy  a  prior  lien  over  real-estate 
mortgages,  since  when  real  estate  is  sold  in  foreclosure,  the 
back  taxes  are  first  deducted  from  the  purchase  price.  They 
precede  every  cent  of  earnings  on  bank  stock,  since  no  divi- 
dend can  be  declared  until  the  annual  taxes  are  paid.  In 
fact,  they  are  a  first  charge  on  tangible  wealth,  in  whatever 
form  it  exists.  Moreover,  the  debt  is  a  community  debt,  de- 
pending upon  the  wealth  and  morals  of  all,  and  is  not  sub^ 
ject  to  the  vagaries,  business  reverses  or  earning  power  of 
individuals  or  corporations. 

B.    THE  FACTORS  CONSIDERED  IN   FIXING  BOND  PRICES 

In  the  preceding  section,  I  have  pointed  out  some  of  the 
functions  of  a  bond  house  in  New  York  City  at  the  time  of 
a  municipal  bond  issue.     This  is  to  protect  the  interests  of 

^  See  an  article  on  "  Public  Obligations,  Municipal  Bonds  Preferable," 
by  E.  S.  Meade,  in  Lippincott's,  89,  474-480,  March,  1912. 


1 82  FINANCES  OF  THE  CITY  OF  NEW  YORK  [365 

clients  and  also  to  inform  them  on  every  point  regarding 
the  investment  ofifered.  Bond  houses  must  do  many  things 
before  they  can  decide  upon  the  price  they  are  to  offer  for 
the  bonds.  One  might  suppose  that  the  only  factor  to  be 
considered  in  the  fixing  of  the  price  of  a  bond  is  the 
market  value  of  current  investments.  This  is,  however,  a 
great  error.  Instead  of  merely  ascertaining  the  return  on  a 
current  investment,  the  bond  dealer  to  determine  the  value 
of  a  bond  accurately,  must  make  calculations  from  many 
other  angles. 

In  the  first  place,  the  location  of  the  municipality  issuing 
the  bonds  must  be  considered,  preference  being  given  to  a 
municipality  which  has  been  settled  for  a  long  period.  For 
this  reason,  New  York  City  bonds  are  the  most  desirable 
and  those  issued  by  the  newest  sections  the  least.  In  the 
second  place,  careful  consideration  must  be  given  to  the 
financial  condition  of  the  city  after  its  territorial  merits  are 
investigated.  In  the  case  of  New  York  City,  for  instance, 
the  proportion  of  its  assessment,  as  against  its  real  estate, 
the  size  of  its  tax  duplicate,  the  total  amount  of  its  indebt- 
edness and  of  what  this  consists,  etc.,  are  all  subjects  of 
special  investigations.  As  to  what  the  city's  indebtedness 
consists  of,  it  can  be  said  that  it  may  be  made  up  of  bondsi 
created  for  special  assessment  purposes,  the  construction 
of  water  works,  erection  of  school  houses,  etc.,  all  of  which 
are  assets  that  can  be  realized  on  after  they  are  finished.  It 
may  also  be  made  up  of  securities  issued  for  improvements 
which  could  not  be  realized  upon,  such  as  sewers  and  streets. 
It  is  the  last  which  the  bond  houses  consider  as  actual  in- 
debtedness. If  this  is  not  too  large,  or  if  it  is  not  over 
8  per  cent  of  the  assessed  valuation,  the  bond-issuing  city 
is  generally  regarded  as  in  good  financial  condition. 

The  showing  of  property  owned  by  New  York  City 
is  very  remarkable.     A  calculation  made  by  the  United 


367]         CITY  BONDS  PREFERRED  BY  IXTESTORS  183 

States  Census  Bureau  as  early  as  1904  placed  a  value  on 
the  salable  property  of  the  city  of  $686,399,355.  A  few  of 
the  more  important  items  were  listed  as  follows :  water 
works,  $i37,ooo,ocx);  docks  and  wharves,  $42,950,300; 
parks  and  gardens,  $288,174,700.  The  productive  property 
of  the  municipality  was  placed  by  the  Federal  authority  at 
$269,586,928.  The  property  holdings  of  New  York  City 
exceed  those  of  Chicago,  Philadelphia,  St.  Louis,  Boston, 
Baltimore  and  Cleveland  combined.^  So  far  as  its  resources 
are  concerned.  New  York  City  stands  next  only  tO'  the 
United  States  government.  The  receipts  of  the  city  as  early 
as  1905,  exclusive  of  the  proceeds  of  loans,  were  over  $125,- 
000,000,  while  the  ordinary  revenues  of  the  United  States 
government  for  the  same  year  were  $544,000,000.  Further, 
the  resources  of  the  banks  of  New  Y'ork  are  one-fourth  of 
all  banking  resources  elsewhere  in  the  country.  This  fact 
is  important,  but  is  not  nearly  so  significant  as  the  fact  that 
of  the  money  deposited  in  New  Y'ork  City  national  banks, 
easily  one-third  represents  the  funds  of  thousands  of  banks 
scattered  from  Maine  to  California.  No  other  city  of  the 
country  is  so  near  to  all  of  the  other  cities  of  the  country  in 
a  financial  way  as  is  New  Y^ork. 

In  the  third  place,  after  being  satisfied  as  to  the  financial 
condition  of  the  city,  the  bond  houses  would  consider  next 
the  provision  for  the  redemption  of  indebtedness.  It  is  im- 
portant to  see  whether  a  sinking  fund  or  some  other  means 
has  been  provided  to  pay  off  the  debt. 

As  a  good  portion  of  the  next  chapter  is  devoted  to  the 
discussion  of  the  sinking  funds  of  the  City  of  New  York.  I 
will  pass  them  by  with  merely  a  brief  remark.  At  the  be- 
ginning of  1906,  the  accumulated  sinking  funds  of  the  city 
amounted  to  about  $170,000,000.     The  operation  of  these 

^  See  a  pamphlet.  N'ew  York  City  Bonds,  a  Preiv.ier  Security,  pub- 
lished by  the  National  City  Bank  of  New  York,  1007,  p.  7. 


1 84  FINANCES  OF  THE  CITY  OF  NEW  YORK  [368 

sinking  funds  is  an  important  element  of  security  to  the 
holders  of  New  York  City  obligations.  Incomes  of  special 
character,  large  in  amount,  are  absolutely  pledged  to  the 
sinking  funds  to  be  devoted  to  the  payment  of  bonds  as  they 
mature.  If  at  any  time  sinking  funds  are  insufficient  to 
cover  the  payment  of  maturing  bonds,  the  charter  compels 
the  Board  of  Estimate  and  Apportionment  to  include  in  the 
annual  budget  an  appropriation  to  cover  the  deficiency. 
This  contingency  is  not  likely  to  arise,  however.  In  tact, 
as  we  shall  see  later  on,  the  city's  sinking-fund  system  has 
been  embarrassed  during  recent  years  by  a  surplus  rather 
than  a  deficiency  of  revenues.  The  system  was  planned 
when  the  revenues  were  much  smaller,  and  while  that  condi- 
tion has  been  expensive  to  the  municipality  itself,  it  has 
added  materially  to  the  security  of  all  the  obligations  issued 
by  New  York  City. 

Moreover,  the  discharge  of  the  city  obligations  is  most 
satisfactorily  guaranteed  by  the  provisions  of  the  New  York 
Charter  of  1898,  as  revised  in  1901,  in  accordance  with  the 
recommendations  of  the  notable  commission  appointed  by 
Governor  Theodore  Roosevelt.  The  charter  specifies  the 
responsibility  of  the  few  men  in  charge  of  the  city's  finances, 
and  it  is  hardly  possible  for  them  to  shift  their  responsibility 
to  their  political  associates.  In  the  making  of  a  budget,  the 
aldermen  have  practically  no  authority,  except  that  they  can 
consider  it  when  submitted  to  them  and  reduce  certain  ap- 
propriations, but  they  cannot  increase  the  items  in  the  bud- 
get nor  insert  new  ones.  The  actions  of  these  few  men  con- 
stituting what  is  known  as  the  Board  of  Estimate  and  Ap- 
portionment, are  further  subject  to  the  supervision  of  the 
government  of  the  State  of  New  York.  The  administration 
of  the  city  affairs  may  be  investigated  by  the  Attorney-Gen- 
eral, under  instructions  from  the  Governor,  w^ho  has  power 
to  suspend  or  to  remove  from  office  all  of  the  members  of 
the  Board. 


369]         <-'^'^^  BONDS  PREFERRED  BY  INVESTORS  185 

More  important,  however,  are  the  charter  limitations  on 
the  power  of  the  Board.  Under  the  law,  the  debt  service, 
including  the  charges  for  interest  and  debt  redemption,  must 
be  provided  for  in  the  annual  budget.  In  the  creation  of 
new  debt,  the  charter  of  the  city  and  the  constitution  of  the 
State  of  New  York  together  provide  ample  and  effective 
restrictions.  Aside  from  the  10  per  cent  restriction  of  the 
assessed  valuation  of  the  city's  real  estate,  other  restrictions 
are  placed  over  the  conduct  of  the  Board  of  Estimate.  For 
instance,  it  is  permitted  to  issue  new  obligations  only  for 
certain  specific  purposes  named  in  the  charter  and  within 
definite  charter  limitations.  There  may  be  incurred  in  any 
one  calendar  year  not  more  than  $2,000,000  of  indebtedness 
for  repaving  of  streets,  and  not  more  than  $3,500,000  ex- 
penditure may  be  authorized  for  acquiring  school  sites  and 
for  constructing  and  equipping  buildings.  The  issue  of 
corporate  stock  for  purposes  other  than  those  specifically 
enumerated  in  the  charter,  or  for  a  sum  in  excess  of  the 
amounts  provided  by  the  charter,  must  receive  the  approval 
of  the  aldermen  after  it  is  authorized  by  the  Board  of  Esti- 
mate. In  a  word,  the  interests  of  the  holders  of  New  York 
City  bonds  are  amply  safeguarded  by  the  charter,  both  in 
respect  to  the  discharge  of  the  existing  obligations  and  the 
creation  of  new  ones. 

In  the  fourth  place,  attention  should  be  given  to  the  num- 
ber of  inhabitants  as  well  as  their  tendency  to  increase.  In 
New  York  City,  the  population  is  increasing  at  a  rapid  rate. 
It  is  to-day  as  great  as  was  that  of  all  the  states  and  terri- 
tories of  the  United  States  west  of  the  Rocky  Mountains  at 
the  last  census.  It  is  equal  to  that  of  fifteen  states  and  ter- 
ritories ;  its  present  total  equals  the  aggregate  census  figures 
of  Vermont,  New  Hampshire,  Delaware,  Oregon,  Idaho, 
Wyoming,  Montana,  Nevada,  Arizona,  New  Mexico,  North 
Dakota,    South    Dakota,    Utah,    Oklahoma,    and    Indian 


l86  FINANCES  OF  THE  CITY  OF  NEW  YORK  [370 

Territory.  More  than  this,  her  ample  water  facilities  and 
public  utilities  have  been  extending  as  her  population  has 
increased.  All  this  is  a  sufficient  proof  that  the  city  is  pro- 
gressing and  is  doing  everything  in  its  power  to  protect  her 
own  interests.  All  this  adds  strength  to  the  belief  that  the 
debt  obligation  of  such  a  municipality  is  second  in  stability 
and  security  only  to  the  debt  obligation  of  the  general  gov- 
ernment. 

C.    DIFFICULTY   OF   MARKETING   THE   CITY   BONDS 

In  a  preceding  section  of  this  chapter,  it  was  said  that  the 
chief  function  of  a  bond  house  is  to  inform  the  buyers  on 
every  point  regarding  the  issue  so  that  the  buyers  may 
have  perfect  confidence  in  the  correctness  of  its  judgment. 
I  have  also  pointed  out  that  all  the  essential  elements  of  a 
good  bond,  such  as  security,  stability,  etc.,  are  found  in 
New  York  City  bonds.  All  this  should  increase  the  ease 
with  which  these  bonds  may  be  disposed  of  in  the  market, 
but  recent  experience  with  bond  sales  point  in  the  contrary 
direction.  Not  only  New  York  City,  but  cities  in  general, 
find  it  almost  impossible  to  dispose  of  their  bonds  at  attrac- 
tive prices  and  difficult  to  sell  them  at  any  price.  Is  the 
trouble  with  the  municipalities  or  with  the  general  invest- 
ment conditions  ?  The  answer  to  this  question,  after  a  cur- 
sory study  of  the  market  condition  for  the  securities  if  all 
bonds,  will  inevitably  be  this — the  trouble  is  mainly  with  the 
investment  market  which  cannot  afford  even  to  absorb  the 
securities  already  issued,  to  say  nothing  of  those  to  be 
floated.  Not  only  municipalities  are  finding  it  difficult  to 
put  out  their  bonds  for  sale,  but  railroads,  public  utilities 
and  industrial  corporations  are  being  compelled  to  pay  pro- 
hibitive rates  of  interest  to  dispose  of  their  securities  and 
even  then  they  find  it  difficult  to  raise  as  much  money  as 
they  actually  need. 


371  ]  CITY  BONDS  PREFERRED  BY  INVESTORS  ifi,y 

Of  course,  if  we  go  deeper  into  the  subject,  we  will  de- 
velop the  fact  that  while  the  apparent  trouble  is  with  the 
market  conditions,  the  fundamental  trouble  lies  in  the  reck- 
less financing  of  the  past.  More  securities  have  been  and 
are  being  issued  than  the  investors  can  absorb.  The  large 
industrial  corporations  have  issued  preferred  stock  and 
bonds,  millions  upon  millions,  and  the  railroads  and  public 
utilities  have  issued  stocks,  bonds  and  notes  to  such  an  ex- 
tent, that  the  market  is  flooded  with  them.  The  expecta-^ 
tions  of  many  of  these  corporations  would  be  realized,  if  the 
investing  public  could  absorb  what  is  already  on  the  market. 

Moreover,  the  municipalities  have  not  been  far  behind  in 
the  race.  Their  indebtedness  is  now  from  two  to  three 
times  what  it  was  ten  years  ago.  That  of  New  York  City 
alone  has  advanced  from  $461,000,000  in  1903  to  $1,228,- 
000,000  in  1913.^  The  new  and  rapidly  growing  cities  in 
the  West  have  poured  bonds  into  the  market  where  ten 
years  ago  they  were  not  known  as  debtors.  On  top  of  all 
these  securities — railroad  securities,  municipals  and  indus- 
trials— there  stand  preeminently  the  new  classes  of  bonds, 
such  as  those  created  by  the  drainage  districts,  irrigation  dis- 
tricts, road  districts,  sanitary  districts,  and  other  kinds  of 
districts. 

The  difficulty  of  marketing  New  York  City  bonds  is  well 
illustrated  by  their  record.  In  1903,  a  sale  of  $25,000,000 
3^  per  cent  bonds  was  made  at  income  rates  ranging  from 
3.32  to  3.45  per  cent;  in  1904.  and  1905,  the  interest  rate 
remained  at  the  same  figure,  but  sales  averaged  only  a  shade 
above  par.  Then  there  followed  an  increase  of  the  interest 
rate  to  4  per  cent ;  sales  were  not  far  from  par  and  the  in- 
come rates  rose  from  3.65  to  3.99  per  cent  in  1906  and  1907. 
The  sales  in  panic  years  were,  of  course,  unfavorable  and 

I  See  a  short  article  on  "'  The  Trouble  with  the  Municipal  Bonds,"  by 
D.  Scott,  in  the  American  City  for  Aug.,  1913,  pp.  146-147. 


l88  FINANCES  OF  THE  CITY  OF  NEW  YORK  ^^^72 

should  on  that  account  be  regarded  as  exceptional.  In 
1909,  an  issue  of  $62,500,000  was  put  out  at  4  per  cent,  the 
average  price  exceeding  par  only  by  a  small  fraction.  Then 
came  the  $110,000,000,  454  per  cent,  in  1910  and  191 1,  the 
income  rates  rising  from  4.15  to  4.20  per  cent.  In  1912,  the 
interest  rate  was  still  4^4  per  cent,  for  $65,000,000  bonds 
sold  at  the  average  price  of  $100.74,  with  an  income  basis  of 
4.21  per  cent.^  The  rate  for  the  1913  issue  of  $45,000,000 
was  raised  to  4^  per  cent ;  the  highest  rate  the  city  has  ever 
been  required  to  pay.  The  awards  ranged  from  100,005 
upwards  and  the  average  of  them  w'as  100.159.  On  that 
basis,  the  income  rate  advanced  from  4.21  per  cent  in  1912 
to  4.49  per  cent  in  19 13.  Therefore,  the  income  rate  which 
was  only  3.31  per  cent  ten  years  ago  was,  in  19 13,  4.49  per 
cent.  The  three  factors  involved  in  the  recent  bond  sales — 
the  smaller  offering,  the  lower  bids  and  the  high  rate  of  in- 
terest— constitute  a  cumulative  proof  of  the  decline  of  the 
market  for  New  York  City  bonds. 

It  has  been  argued  that  there  is  really  no  cumulative 
proof  of  the  decline  of  the  New  York  City  bond  market,  be- 
cause the  191 1  bond  issue  of  $60,000,000  had  been  declared 
a  phenomenal  success.  This  argument  grows  out  of  the 
wrong  interpretation  that  has  been  placed  upon  the  figures 
of  that  bond  sale,  w^hich  was  held  in  February.  Five  hun- 
dred and  sixty-one  separate  bids  were  received.  The 
amount  of  bonds  bid  for  aggregated  $324,032,000.  that  i^  to 
say,  the  $60,000,000  offer  was  over-subscribed  some  five 
times.  The  bonds  were  sold  at  the  average  price  of  100.94, 
on  the  basis  of  which  the  bonds  bearing  an  interest  rate  of 
4%  per  cent  would  yield  to  the  buyer  an  income  of  4.20  per- 
cent. Of  the  bonds  allotted,  only  three  quarters  of  one  per 
cent  ($500,000)  went  to  private  investors;  the  rest  all  went 

^  The  Independent,  May  29,  1913,  no.  74,  p.  1220. 


373]  '^^■^^^  BONDS  PREFERRED  BY  INVESTORS  189 

to  investment  banking  houses,  banks  and  insurance  com- 
panies. 

The  large  number  of  bidders  and  the  amount  of  over- 
subscriptions were  certainly  impressive.  Enthusiasm,  on 
this  score,  however,  is  somev^^hat  abated  by  considering  the 
average  price  of  100.94  paid  for  a  454  per  cent  bond  of  the 
largest  and  richest  city  in  the  United  States.  Again,  the 
fact  that  practically  the  entire  issue  went  to  the  large  financial 
institutions  and  that  private  investors  took  a  very  small  part 
in  the  bidding  is  a  matter  demanding  sober  consideration. 
It  may  be  argued  that  some  private  investors  put  in  their 
bids  through  the  bankers  with  whom  they  are  in  business 
relations,  but  certainly  their  participation  in  this  issue  was 
disappointingly  small.  We  must  not  fail  to  lay  stress  upon 
the  subscriptions  for  city  bonds  in  191 1,  because  unless  we 
inquire  into  the  circumstances  surrounding  this  issue,  quite 
erroneous  deductions  might  be  drawn  from  the  great  num- 
ber of  bids  and  amount  of  oversubscriptions.  It  was  whis- 
pered all  around  on  the  day  of  sale  that  the  sale  was  a  phe- 
nomenal success  in  the  city's  financing ;  but  in  considering 
what  one  of  these  sales  of  city  bonds  shows  or  does  not 
show,  we  must  take  account  of  the  fact  that  bankers  and 
brokers  habitually  bid  for  many  more  of  the  bonds  than 
are  actually  needed,  on  the  idea  that  all  bids  would  be  scaled 
down.  In  addition,  we  must  not  overlook  another  important 
factor  in  the  bidding.  Around  the  street,  in  the  open 
market,  the  191 1  city  bonds  were  being  traded  in  at  a  given 
price.  To  be  allotted  bonds  by  the  city  below  that  price 
meant,  therefore,  a  chance  to  sell  out  and  realize  a  quick 
profit.  The  fact  that  the  191 1  issue  of  corporate  stock  was 
some  five  times  over-subscribed  for,  is  thus  by  no  means  a 
positive  proof  that  there  existed  an  investment  demand  for 
any  such  amount  of  the  bonds.  From  the  $325,000,000 
subscribed,  there  must  be  deducted  all  the  excess  amount 


I  go  FINANCES  OF  THE  CITY  OF  NEW  YORK  [374 

bid  for  by  those  interests  which  feared  lest  their  lots  should 
be  scaled  down  and  then  all  the  subscriptions  made  with  the 
intention  of  selling  them  out  immediately  at  a  profit/ 

The  discussion  of  the  declining  market  for  New  York 
City  bonds  may  lead  one  to  think  that  the  city's  credit  is 
falling.  Careful  reflection,  however,  shows  that  this  is 
not  exactly  the  case.  It  is  true  that  a  glance  over  the  his- 
tory of  the  bond  sales  of  the  city  reveals  a  downward  ten- 
dency in  the  market  price  of  her  bonds,  accompanied  by 
the  opposite  tendency  of  interest  rates  and  income  basis, 
but  we  must  know  that  the  history  of  bond  sales  in  other 
cities  shows  the  same  tendency.  They  have  also  found  it 
difficult  to  borrow  at  the  old  rates.  San  Francisco,  in  19 13, 
could  get  only  a  fraction  over  par  for  her  5  per  cent  bonds. 
Many  other  instances  in  the  field  of  investment  here  and 
abroad  could  be  cited.  In  Lx)ndon,  at  about  the  same  time* 
with  the  New  York  City  issue  of  19 13,  ten  large  offeringsi 
amounting  in  all  to  $138,000,000  were  responded  to  only  by 
$14,000,000  of  bids  from  the  public.  Subscriptions  for 
Brazil's  $55,000,000  five  per  cent  bonds  at  97  were  only  $4,- 
000,000. 

The  remarkable  over-subscription  for  the  Chinese  5  per 
cents  at  90  should  be  passed  over  as  an  exception,  on  the 
ground  that  at  that  low  price,  they  yield  an  income  of  more 
than  5^  per  cent. 

On  the  other  hand, 'during  the  years  1908  to  1912,  the 
German  imperial  loan,  3  per  cent,  declined  8  points.  Prus- 
sian consols,  3  per  cent,  declined  7^  points.  French  per- 
petual rentes,  3  per  cent,  declined  6.75  points.  Austrian 
gold  rentes,  4  per  cent,  declined  6.45  points.  The  Dutch 
loan,  2^  per  cent,  declined  gj4,  points.     British  consols, 

*  See  an  article  by  Franklin  Escher  on  "  The  New  York  City  Bond 
Sale  of  191 1,"  in  Flarper's  Weekly,  Feb.  11,  191 1. 


^7:;]         CITY  BO.\DS  PREFERRED  BY  IMESTORS  iqi 

2.y2  per  cent,  declined  9  1/16  points/  It  is  evident,  there- 
fore, that  the  dechne  of  the  New  York  City  bonds  cannot  be 
regarded  as  a  sign  of  its  falling  credit,  because  there  are 
declines  in  the  bonds  of  other  cities  and  foreign  countries. 

There  are  several  causes  of  the  public  failure  to  accept 
new  good  municipal  bonds  at  rates  which  were  attractive 
not  long  ago.  In  Europe,  there  had  been  in  19 13  an  unpre- 
cedented hoarding  of  money  as  a  result  of  the  Balkan  War 
and  of  fear  of  similar  wars  to  come.  Moreover,  some  in- 
vestors awaited  the  highly  favorable  terms  for  the  money 
to  be  borrowed  by  those  who  must  pay  their  war  debts. 
This  country  cannot  relieve  itself  of  the  influence  of  mone- 
tary conditions  in  Europe. 

The  second  cause  of  the  public  failure  to  absorb  good 
municipal  bonds,  like  those  of  New  York  City,  is  found  in 
the  competition  of  other  and  better-paying  securities.  There 
is  now  a  tendency  of  the  investors  to  luxury  and  good  liv- 
ing, which  drive  them  to  abandon  the  highest  class  of  invest- 
ments in  favor  of  a  lower,  but  comparatively  safe,  class, 
which  returns  a  large  income.  The  city  has  been  accused 
by  some  people  of  extravagance  and  waste,  which  they  think 
is  responsible  for  the  decline  of  the  prices  of  its  bonds,  but 
we  must  know  that  the  extravagance  of  the  city  has  been 
accompanied  by  a  great  volume  of  personal  extravagance, 
which  has  caused  the  people  to  search  for  high  yielding' 
securities,  irrespective  of  that  element  of  intrinsic  value  that 
is  regarded  as  the  primal  consideration  with  conservative 
investors. 

The  third  cause  is  that  new  countries  are  making  such 
great  demands  upon  the  credit  repository  that  there  is  not 

'See  an  address  entitled,  "Tendencies  in  Municipal  Credit,"  deliv- 
ered by  Hon.  Wm.  A.  Prendergast,  Comptroller  of  the  City  of  New 
York,  before  the  National  Association  of  Credit  Men,  at  its  annual 
convention,  Cincinnati,  O.,  June  18,  1913. 


jg2  FINANCES  OF  THE  CITV  OF  NEW  YORK  [376 

enough  for  general  distribution.  When  that  condition  pre- 
vails, it  stands  to  reason  that  the  government  will  be  judged 
by  the  same  rigorous  rules  of  credit  extension  that  have 
been  applied  to  the  individual. 

The  fourth  cause  of  the  falling  price  of  New  York  City 
bonds  is  found  in  the  extension  to  all  municipal  bonds 
throughout  the  State  of  New  York  of  the  tax-exemption 
privilege.  As  long  as  tax-exempt  bonds  in  the  state  were 
rare,  they  sold  at  a  premium.  Thus,  "  the  New  York  City 
two-and-one-half  per  cent  bonds  at  one  time  sold  above  par, 
because  they  were  much  sought  after  by  savings  banks, 
trust  companies  and  insurance  companies,  in  order  to  escape 
the  franchise  tax."  ^  Since  1908,  the  tax-exemption  privi- 
lege has  been  extended  to  all  municipal  bonds  throughout 
the  state,  and  this  has  accelerated  the  progressive  disap- 
pearance of  the  premium  on  New  York  City  bonds. 

The  four  reasons  enumerated  above  are  sufficient  tO' 
prove  that  the  decline  in  the  market  value  of  New  York 
City  bonds  is  not  due  to  her  falling  credit.  As  a  matter  of 
fact,  there  is  no  reason  to  doubt  the  integrity  of  her  credit. 
The  financial  record  of  the  city  has  been  without  flaw. 
There  is  no  taint  of  repudiation  to  exclude  its  obligations 
from  the  most  technical  list  of  "  savings  bank  securities  ". 
Detailed  statistics  may  be  given  to  show  the  prompt  retire- 
ment of  bonds  when  becoming  due.  Historically,  the  finan- 
cial good  faith  of  New  York  City  is  on  a  par  with  that  of 
the  general  government. 

The  19 14  issue  of  $65,000,000  is  of  special  interest,  as  it 
illustrates  the  city's  high  credit  in  a  large  measure.  The  in- 
terest rate  is  only  4^  per  cent,  as  against  4^  per  cent  for 
the  1913  sale,  and  the  amount  is  $20,000,000  more  than 
that  of  the  latter  which  was  only  $43,000,000.    The  income 

^  Seligman,    "  The    Income   Tax    Amendment,"    in    Political   Science 
Quarterly,  vol.  xxv,  no.  2. 


{ 


377]    ^^''^^'  BONDS  PREFERRED  BY  INVESTORS  1^3 

rate  for  1914  is  4.18  per  cent/  whereas  that  for  19 13  was 
4.49  per  cent.  The  success  of  the  19 14  issue  was  considered 
as  the  more  important  by  reason  of  the  fact  that  the  New 
York  Central  had  just  sold  $40,000,000  bonds  and  other 
large  issues,  including  one  by  the  State  of  New  York,  have 
been  taken  eagerly  in  the  last  few  months.  If  it  were  not 
for  the  sending  of  battle-ships  to  Mexico,  with  its  sugges- 
tion of  possible  intervention,  with  the  necessity  for  an  issue 
of  government  bonds,  probably  some  potential  competitors 
for  the  city  stock  would  not  have  withheld  their  bids,  and 
the  result  of  the  sale  would  have  been  even  more  encour- 
aging. All  this  goes  to  prove  the  city's  high  credit  as  well 
as  the  gratifying  improvement  in  monetary  conditions. 

In  justice  to  the  holders  of  New  York  City  bonds,  it 
must  be  said,  however,  that  municipal  bookkeeping  in  the 
City  of  New  York  has  not  been  maintained  on  as  high  a 
level  as  in  private  business.  It  is  only  within  the  past  few 
years  that  some  progress  has  been  made  in  this  important 
branch  of  municipal  work. 

To  what  extent  poor  business  methods  have  existed  and 
how  far  they  have  affected  the  good  faith  of  the  city, 
is  of  course  difficult  to  measure.  But  it  can  be  safely  as- 
serted that  had  better  methods  been  observed,  there  would 
have  been  a  closer  watch  upon  the  conduct  of  municipal 
affairs,  because  much  of  the  extravagance  of  which  the  city 
has  been  guilty,  has  been  due  to  the  fact  that  the  people 
have  had  no  exact  and  accurate  data  to  enable  them  to 
form  a  correct  judgment  of  the  financial  condition  of  the 
city.  If  the  facts  of  the  city's  affairs  were  not  intelligently 
collected  and  placed  before  the  people,  how  could  they  be 
expected  to  entertain  a  very  high  regard  for  the  city's 
bonds  ? 

^New  York  Herald,  April  16,  1914,  p.  7. 


194  FINANCES  OF  THE  CITY  OF  NEW  YORK  [378 

D.    ISSUING   BONDS   IN    SMALL   DENOMINATIONS 

The  difficulty  of  marketing  the  bonds  has  naturally  led 
some  municipal  experts  to  devise  means  of  making  them 
more  marketable.  One  of  the  methods  suggested  is  to 
sell  bonds  in  small  denominations,  because  it  is  argued  that 
bonds  can  be  more  easily  sold  in  small  denominations  than 
in  large  denominations.  According  to  the  American  Re- 
Z'iczv  of  Reviews,  in  1910.  the  American  railways  were  then 
selling  their  bonds  in  France  in  denominations  of  five  hun- 
dred, two  hundred,  and  one  hundred  dollars  and  smaller  de- 
nominations. The  common  people  in  France  are  specially 
fond  of  investing  their  savings  in  bonds  of  small  denomina- 
tions. The  City  of  St.  Paul  anticipates  its  tax  levy  by  sell- 
ing tax  certificates  (revenue  bonds)  to  the  amount  of  80 
per  cent  of  the  tax  levy.  In  the  fall  of  1907.  a  panic  year, 
St.  Paul  advertised  for  an  issue  of  $250,000  4  per  cent 
bonds.  As  money  at  that  time  was  very  "  tight  ",  no  bids 
were  received.  The  law  forbade  the  city  to  sell  its  bonds 
below  par ;  and  in  order  to  push  the  sale  through,  the  comp- 
troller was  authorized  to  sell  the  bonds  over  the  counter  at 
par  and  accrued  interest,  in  denominations  of  $500  and 
$1,000,  with  the  result  that  the  entire  lot  was  disposed  of  in 
six  or  eight  weeks.  A  similar  instance  of  small  investment 
is  found  in  the  fact  that  the  common  people  are  now  putting 
their  savings  in  the  post  office  and  buying  money  orders 
all  over  this  country.  All  this  shows  that  the  common  peo- 
ple of  this  country  are  not  buying  one-thousand-dollar 
bonds. 

But  what  is  true  in  the  other  parts  of  the  United  States, 
is  not  true  in  the  City  of  New  York.  In  1902,  the  then 
comptroller  of  the  city  decided  upon  issuing  bonds  in  de- 
nominations so  small  that  the  common  people,  as  you  choose 
to  call  them,  could  invest.  In  that  year  $29,000,000  of 
long-term  bonds  were  put  out  for  sale,  with  a  life  varying 


379]    C^^^  BONDS  PREFERRED  BY  INVESTORS  195 

from  twenty  to  fifty  years;  in  1905,  $41,000,000;  in  1906, 
$57,000,000;  in  1907,  $79,000,000;  in  1908,  $73,000,000^ 
and  in  1909,  $72,500,000  were  successively  put  out  for  sale. 
Mr.  Grout,  the  comptroller,  expected  to  find  a  wide  market 
for  the  bonds  by  offering  them  in  such  denominations  that 
the  people  who  wanted  to  buy  a  $20  bond  could  have  it. 
But  "  there  was  not  $60,000  of  one  entire  issue,  amounting 
to  over  $20,000,000,  sold  in  that  way."  ^ 

The  bonds  bore  an  interest  of  y/2  per  cent  in  1902,  but 
they  were  bought  on  a  3. 10  basis.  The  savings  banks  at  that 
time  were  paying  43/2  per  cent,  but  had  been  reducing  their 
rate  while  the  municipalities  had  been  increasing  theirs. 
Still  it  was  difficult  to  dispose  of  the  municipal  bonds.  As 
a  general  rule,  therefore,  the  demands  for  small  items  are 
relatively  few,  although  they  are  large  in  Europe,  owing  to 
the  popularity  of  government  and  municipal  bonds,  with 
the  wage-earners.  In  France,  the  denomination  of  500 
francs  is  more  common  than  any  other;  in  England,  £100;, 
in  Germany,  Mi 000;  and  in  Holland  1000  fl.  In  some  in- 
stances, smaller  or  larger  denominations  are  issued  for  part 
of  a  loan;  as  in  England,  where  £200,  £500,  and  £1000  are 
issued ;  but  as  a  general  rule,  the  smaller  denominations  have 
a  broader  market." 

It  has,  therefore,  been  found  true  in  the  City  of  New 
York  that  the  small  denomination  of  her  bonds  did  not 
affect  their  disposal  in  the  market.  On  the  other  hand,  the 
failure  of  the  bond  sale  of  June  8,  1909,  together  with  the 
depressed  prices  of  New  York  City  bonds  at  present,  is  not 
due  to  the  issue  of  bonds  in  large  denominations,  but,  as  I 

'  Proceedings,  Fifth  Annual  Convention,  National  Association  of 
Comptrollers  and  Accounting  Officers,  1910,  p.  113. 

*  See  an  address  on  "  Municipal  Financing,"  by  Edmund  D.  Fisher, 
Deputy  Comptroller  of  the  City  of  New  York,  delivered  at  Annual 
Convention  of  the  Investment  Bankers'  Association  of  America,  Oct. 
29,  1913. 


1^6  FINAXCES  OF  THE  CITY  OF  NEW  YORK  [380 

have  pointed  out  above,  to  the  over-supply  of  New  York 
City  bonds  in  tlje  market.  This  is  clearly  indicated  by  the 
current  market  quotations  on  New  York  City  bonds.  Every 
additional  issue  tends  to  force  down  the  prices  of  the  bonds 
already  outstanding,  particularly  those  bearing  a  lower  rate 
of  interest. 

Even  if  it  were  possible  to  increase  the  marketability  of 
New  York  City  bonds  by  issuing  them  in  small  denomina- 
tions, still  the  charter  stands  in  the  way ;  for  it  says :  "Pref- 
erence shall,  as  far  as  practicable,  and  without  pecuniary 
disadvantage  to  the  said  City  of  New  York,  be  given  to  the 
applicant  for  the  smallest  amounts  and  smallest  denomiina- 
tions  of  said  bonds  in  issuing  the  same."  This  was  clearly 
intended  to  encourage  the  average  investor  to  buy  the  city 
bonds  and  at  the  same  time  to  widen  the  market  for  them. 
But  a  careful  reading  of  this  provision  brings  into  promi- 
nence a  restriction  contained  therein,  i.  c.,  "  without  pecuni- 
ary disadvantage''.  This  clause  ties  the  comptroller's  hands 
and  makes  the  provision  almost  a  dead  letter.  A  good  illus- 
tration of  this  is  found  in  the  191 1  sale  of  $60,000,000 
bonds.  Under  the  law,  the  comptroller  must  get  as  much 
as  he  can  for  them.  There  were  571  offers  for  them,  one 
of  which  came  from  a  syndicate  headed  by  Mr.  J.  Pierpont 
Morgan.  It  was  an  all-or-none  offer,  which  means  that  the 
syndicate  offered  to  buy  the  entire  issue  or  none  at  all.  Thtf 
premium  oft'ered  by  the  syndicate  was  897-1,000  of  one  per 
cent.  For  at  least  two  hours,  during  the  time  the  bids  that 
had  poured  into  the  comptroller's  office  were  being  opened, 
it  seemed  as  if  the  syndicate's  offer  had  been  higher 
than  the  average  best  of  the  other  570  offers.  Here  the 
comptroller  was  placed  in  a  position  of  dilemma,  which 
gave  him  a  good  deal  of  embarrassment.  Under  the  law, 
he  was  bound  to  make  a  single  award  to  the  syndicate  since 
it  offered  the  highest  price  for  the  bonds.     But  it  was  not 


-,81  ]    CITY  BONDS  PREFERRED  BY  INVESTORS  igy 

good  policy  for  the  city  to  let  the  whole  issue  go  to  any 
single  group  of  men,  because  the  effect  of  such  a  sale  would 
be  to  discourage  the  average  investor.  If  such  a  sale  were 
repeated  two  or  three  times  in  succession,  it  would  deprive 
the  average  investor  of  his  chance  for  a  safe  investment  in 
New  York  City  bonds,  and  would  place  the  future  sales  in 
the  hands  of  a  small  group  of  shrewd  bankers.  For  this 
reason,  Comptroller  Prendergast  studied  the  charter  very 
carefully  and  tried  to  find  out  if  he  had  the  right  to  make 
awards  to  small  investors  even  should  their  average  bids 
fall  a  fraction  short  of  that  of  the  Morgan  syndicate.  He 
tried  to  interpret  the  clause  "pecuniary  disadvantage  to  the 
city  "  in  the  sense  of  permanent  pecuniary  disadvantage. 
But  it  was  a  forced  interpretation  and  he  finally  came  to  the 
conviction  that  he  had  not  the  right.  If  the  syndicate's  bid 
was  higher  than  the  average  best  bids  of  the  other  570  bid- 
ders, the  entire  issue  must  go  to  the  syndicate.  Fortu- 
nately, the  average  best  bids  for  the  $60,000,000  of  bonds 
turned  out  to  be  three  one-thousandths  of  one  per  cent 
higher  than  that  of  the  Morgan  syndicate,  the  premium 
they  showed  being  900-1,000  of  one  per  cent.  Consequently, 
the  bonds  were  allotted  to  the  general  bidders  and  it  was 
hoped  that  the  small  investors  were  encouraged.^ 

On  the  contrary,  the  19 14  issue  of  $65,000,000  bonds 
bearing  interest  at  the  rate  of  4^  per  cent  went  to  a  syndi- 
cate composed  of  Kuhn,  Loeb  and  Company  and  William 
A.  Read  and  Company,  whose  bid  of  101.45,  ^^^  the  high- 
est. Its  total  bid  was  $65,042,500,  the  city  thereby  getting 
a  premium  of  $942,500.  But  for  the  slight  increase  offered 
by  the  syndicate,  the  issue  would  have  been  parceled  out 
among  many  bidders.  The  difference  between  the  successful 
bid  and  the  next  nearest  amounted  to  only  four  mills  on  the 
dollar  or  $4  on  each  $1,000  for  the  entire  issue. ^ 

>  Collier's  Weekly,  47,  34,  May  6,  191 1. 
*  New  York  Times,  April  16,  1914,  18,  i. 


CHAPTER  VIII 

New  Methods  of  Financing 

New  methods  of  financing  in  the  city  of  New  York  pre- 
sent a  complicated  but  interesting  problem.  They  are  most 
essential  to  the  welfare  of  her  5,000,000  inhabitants,  be- 
cause the  city's  finances  have  now  reached  an  aggregate  of 
over  $500,000,000  annually.  These  new  methods  may  be 
broadly  classified  under  four  general  headings:  (A)  new 
methods  of  temporary  financing;  (B)new  methods  of  long- 
term  financing;  (C)  new  methods  of  sale;  (D)  new  methods 
of  maintaining  the  sinking  funds. 

A.  the  new  methods  of  temporary  financing 

About  thirty  of  the  principal  cities  of  the  United  States 
collect  their  taxes  about  four  months  after  the  beginning  of 
the  average  fiscal  year.  Some  of  them  make  collections  well 
in  advance;  some,  as  in  the  case  of  New  York  City,  make 
collections  about  eight  months  after  the  beginning  of  the 
year.  Most  municipalities  collect  only  eighty-five  per  cent 
of  their  annual  tax  levy,  during  the  year,  for  two  reasons — < 
late  collection  and  back  taxes.  The  problem  of  temporary 
financing  has  become  fixed  within  the  large  municipalities. 

In  London  payment  is  made  semi-annually,  and  in  some 
boroughs  it  is  optional  to  pay  the  taxes  quarterly.  It  has 
become  a  prevailing  custom  in  most  British  provinces  to 
pay  taxes  semi-annually.  In  the  smaller  cities  of  the  United 
States,  however,  taxes  are  received  so  late  that  it  has  been 
found  necessary  to  sell  "  revenue  warrants  "  mainly  to  the 
local  banks,  wheras  in  the  larger  cities,  the  fiscal  authorities 
198  [382 


083]  '^'EJV  METHODS  OF  FINANCING  199 

are  obliged  to  negotiate  temporary  loans  in  large  amounts, 
or  to  sell  revenue  bonds  in  small  lots  as  money  is  required 
for  mtime  to  time.  The  life  of  the  bonds  varies  from  one 
to  twelve  months ;  it  may  be  longer  as  the  amounts  to  be  bor- 
rowed and  the  conditions  of  the  market  may  justify.  Dur- 
ing the  years  1908  and  1909  the  amount  of  these  temporary 
borrowings  by  New  York  City  had  become  so  large  that  it 
was  deemed  necessary  to  find  a  broad  market  for  them  in 
order  to  effect  a  saving  of  interest  for  the  city.  But  because 
these  evidences  of  temporary  indebtedness  were  issued 
under  the  name  of  bonds  in  accordance  with  the  charter, 
they  were  not  much  desired  by  the  foreign  buyers,  especially 
in  England,  where  as  bonds  they  were  subject  to  a  tax  of 
one-half  of  one  per  cent,  whereas  a  payment  of  only  one- 
twentieth  of  one  per  cent  would  have  been  necessary  if  they 
had  been  issued  under  the  name  of  bills.  In  order  to  assure 
the  city  a  broader  market,  legislation  was  secured  in  1910 
authorizing  the  city  to  issue  these  short-term  bonds  in  the 
form  of  bills,  payable  in  the  currency  of  foreign  countries. 
The  city  immediately  availed  itself  of  this  legislation,  and  is 
now  enjoying  the  advantage  not  only  of  a  broader  market 
for  its  revenue  bonds,  but  an  opportunity  to  take  advantage 
of  the  best  rates  wherever  they  are  found. 

These  methods,  in  addition  to  the  operation  of  the  semi- 
annual tax  plan,  have  effected  a  large  saving  in  interest,  as 
shown  by  the  following  figures  : 

Interest  charge,  1909 — $5,200,000 

Interest  charge,  19 10 — $4,000,000 

Interest  charge,  191 1 — $3,800,000 

Interest  charge,  19 12 — $2,400,000'^ 

*  See  an  address  by  Edmund  Fisher,  on  "  Municipal  Financing,"  de- 
livered at  Annual  Convention  of  Investment  Bankers'  Association  o£ 
America,  Oct.  29,  1913,  p.  2. 


200  FINANCES  OF  THE  CITY  OF  NEW  YORK  [384 

It  is  customary  in  New  York  to  issue  bills  in  sterling, 
francs,  or  marks,  as  the  case  may  be,  and  this  kind  of  tem- 
porary borrowing  has  reached  upwards  of  £7,000,000  and 
75,000,000  frs.  in  a  year.  They  are  issued  in  the  form  of 
bills,  on  a  discount  basis.  This  borrowing  has  resulted  in 
an  exchange  transaction,  when  the  money  is  borrowed  and 
when  the  money  is  returned.  When  the  money  is  borrowed, 
it  is  received  in  pounds  sterling  in  London,  and  in  order  to 
get  dollars,  the  city  has  to  sell  this  sterling.  On  the  other 
hand,  when  the  loan  becomes  due,  the  city  has  to  "  buy  ex- 
change ",  i.  c,  to  turn  dollars  into  sterling.  As  the  money 
is  generally  borrowed  in  the  spring  months  when  the  money 
market  in  the  United  States  is  favorable,  the  exchange  rates 
are  high ;  for  that  reason  more  dollars  can  be  secured  for  an 
equal  amount  of  pounds  sterling  in  the  spring  than  in  the 
fall.  On  the  other  hand,  when  payment  is  made  in  the  fall, 
when  money  is  ''tight  "  in  the  United  States,  owing  to  the 
crop  movement,  the  exchange  rates  are  low ;  hence,  less  dol- 
lars are  required  to  buy  an  equal  amount  of  pounds  sterling 
in  the  fall  than  in  spring.  In  either  case,  the  city  gains,  be- 
cause a  considerable  profit  is  made  on  the  exchange.  Thisi 
gain  has  the  effect  of  reducing  the  interest  on  the  money 
borrowed,  because  the  exchange  profit  very  frequently 
equals  one-half  of  one  per  cent.  A  4^  per  cent  loan  is,  in 
practical  effect,  on  a  4  per  cent  basis.  The  same  advantage 
may  be  taken  of  the  money  conditions  in  the  domestic 
market,  if  a  close  watch  is  kept  upon  the  trend  of  interest 
rates.  Loans  may  sometimes  be  made  at  3^  per  cent  in  one 
week,  while  in  the  next  week,  the  rate  advances  to  45^  per 
cent  or  higher.  It  all  depends  upon  the  judgment  and  ex- 
perience of  the  city  financiers  to  get  the  most  out  of  tem- 
porary borrowing.  Sometimes,  the  money  conditions  are 
such  as  to  make  the  city  officials  choose  between  short-term 
and  long-term  loans.    In  the  past  it  has  frequently  been  the 


385]  '^^^  METHODS  OF  FINANCING  20I 

case  that  the  interest  rates  for  time  money  were  relatively 
high,  while  those  for  call  money  were  abnormally  low. 
Thirty  to  sixty-day  borrowing  with  renewals  is  therefore 
preferable  to  the  borrowings  for  the  time  needed. 

B.    NEW    METHODS    OF   LONG-TERM    FINANCING 

It  has  been  customary  for  the  City  of  New  York  to  go  into 
the  market  for  long-term  bond  sales  more  than  once  a  year. 
This  meant  that  when  the  city  was  in  great  need  of  money, 
it  would  find  itself  very  much  embarrassed  because  of  the  in- 
sufficient supply  of  funds  in  the  money  market.  This 
method  of  financing  had  been  very  costly  to  the  city.  The 
city  would  certainly  benefit  much  by  letting  it  be  known  to 
the  financial  world  that  the  city  would  not  make  long-term 
borrowings  more  than  once  a  year.  With  this  object  in 
view,  the  present  comptroller  made  a  single  sale  of  $50,- 
000,000  in  19 10,  which  was  a  great  success  compared  with' 
the  sales  made  by  other  cities.  The  interest  rate  on  these 
bonds  was  fixed  at  434  per  cent.  The  second  single  sale  of 
$60,000,000  at  4^  per  cent  took  place  on  January  24,  191 1, 
and  the  third  single  sale  of  $65,000,000  at  4^  per  cent  was 
held  on  May  7,  1912.  This  new  method  of  financing  is 
beneficial  both  to  the  investing  public  and  the  city,  because 
it  does  not  make  a  pressing  demand  upon  the  money  market 
when  money  is  "  tight  "  and  at  the  same  time  relieves  the 
city  from  the  necessity  of  paying  abnormally  high  rates. 
These  large  sales,  however,  were  open  to  the  serious  criti- 
cism that  a  large  amount  of  money  was  left  with  the  banks 
on  deposit.  The  city  receives  only  about  2  per  cent  interest 
on  its  deposits  while  it  pays  4^  per  cent  on  the  money  bor- 
rowed. Therefore,  the  city  really  suffered  from  an  unnec- 
essary loss.  This  criticism  was  justifiable,  although  the  loss 
incurred  was  more  than  offset  by  the  timely  sale.  At  present, 
a  newer  method  has  been  devised  to  avoid  the  carrying  of 


202  FINANCES  OF  THE  CITY  OF  NEW  YORK  [386 

large  sums  of  long-term  money  in  the  depositaries.  It  con- 
sists of  issuing  the  corporate  stock  notes  for  a  tenn  not 
longer  than  one  year,  to  be  paid  out  of  the  next  succeeding 
bond  sale.  The  city  is  now  able  to  borrow  money  for  cor- 
porate purposes  on  these  short-term  notes,  effecting  a  con- 
siderable saving  in  interest  charges,  and  is  in  a  position  to 
borrow  money  whenever  it  is  in  need  of  it. 

Further,  this  method  of  borrowing  money  on  short-term 
notes  makes  it  possible  to  get  money  as  required  for  imme- 
diate disbursement,  thus  giving  flexibility  in  financing  which 
is  essential  to  good  business  management.  Formerly,  the 
city  was  frequently  behind  in  paying  its  bills,  while  it  kept 
on  deposit  a  large  amount  of  money.  The  question  would 
naturally  be  asked.  Why  was  it  that  the  payment  was  de- 
layed, whereas  the  city  had  millions  of  dollars  on  hand? 
The  answer  to  this  question  was  that  none  of  the  money  in 
the  banks  belonged  to  the  fund  from  which  a  particular 
bill  might  be  paid.  Another  cause  of  delay  in  the  city's  pay- 
ments was  that  under  the  law,  no  payment  could  be  made* 
for  a  certain  contract  awarded  for  a  piece  of  work  of  public 
improvement,  unless  bonds  covering  that  particular  contract 
had  been  sold.  This  delay  added  much  confusion  to  the 
city's  financing  and  was  most  oppressive  to  the  city's  cred- 
itors, especially  for  land  liability.  It  has  been  the  city'si 
practice  to  take  in  land  by  condemnation  proceedings  which 
sometimes  lasted  for  a  number  of  years.  The  claimants 
suffered  great  hardship  owing  to  the  delay  in  making  pay- 
ment for  the  awards,  although  they  would  be  entitled  to  in- 
terest from  the  time  the  title  became  vested  in  the  city.  All 
those  difficulties  were  removed  by  the  new  method  of  issuing 
corporate  stock  notes  for  a  term  not  longer  than  one  year, 
because  it  places  the  city  in  a  position  to  get  money  when 
needed,  without  resorting  to  the  old  practice  of  issuing  long- 
term  bonds  when  it  is  inexpedient  to  do  so.    In  consequence 


387]  NEM^  METHODS  OF  FINANCING  203 

of  this  change,  $15,000,000  was  paid  for  land  acquired  in 
1910,  and  $28,000,000  in  191 1,  as  against  an  average  of 
$10,000,000  in  the  previous  years.^ 

I  have  thus  outlined  two  successive  steps  in  bringing^ 
about  this  wise  reform:  (i)  the  policy  of  a  single  annual 
sale  which  affords  the  bankers  and  brokers  ample  opportu- 
nity to  dispose  of  the  city's  securities,  without  the  appre- 
hension of  a  large  sale  of  new  bonds;  (2)  the  policy  of 
issuing  notes,  which  not  only  prevents  the  accumulation  of 
big  balances  with  loss  of  interest  to  the  city,  but  also  enables 
the  city  to  await  favorable  market  conditions  for  an  issue  of 
corporate  stock.  As  a  result  thereof,  the  floating  debt  of 
the  city  July  11,  1912,  was  $40,714,022.24,  as  against  ap- 
proximately $115,000,000  for  the  corresponding  date  in 
1910.^ 

The  corporate  note  is,  in  effect,  a  short-time  instrument 
analogous  to  the  railroad  note.  It  is  estimated  that  the  city 
saves  approximately  $1,000,000  annually  in  interest, 
through  the  operation  of  the  note  issue.  These  notes  have 
been  sold  on  a  basis  of  approximately  3  per  cent,  whereas 
the  former  corporate  stock  issues  of  the  city  are  practically 
on  a  4  per  cent  basis.  By  this  temporary  financing,  a  sav- 
ing of  about  I  per  cent  ^  was  effected.  This  saving  was 
possible  only  because  of  the  city's  good  credit  and  the  favor- 
able money  market.  If  rates  were  very  high,  however,  the 
principle  would  be  equally  valuable,  because  a  bond  sale 
might  be  inexpedient. 

I  have  just  said  that  the  policy  of  issuing  notes  not  only 

*  See  an  article  on  "  New  York  City  Finances,"  by  Wm.  A.  Prender- 
gast,  Comptroller  of  New  York  City,  in  National  Municipal  Review, 
vol.  ii,  no.  2,  April,  1913,  pp.  221-229. 

'  Annual  Report,  1912-13,  of  the  Chamber  of  Commerce,  New  York, 
p.  59- 

'  Anna's  of  American  Academy  of  Political  and  Social  Science,  1912, 
vol.  14,  pp.  74-5- 


204  FINANCES  OF  THE  CITY  OF  NEW  YORK  [388 

prevents  the  accumulation  of  big  balances  with  loss  of  in- 
terest to  the  city,  but  also  enables  the  city  to  await  favorable 
market  conditions  for  an  issue  of  corporate  stock.  This  is 
best  illustrated  by  the  most  recent  sale  of  $65,000,000, 
which  took  place  April  15,  1914.  When  it  is  remembered 
that  this  is  a  4^4  per  cent  stock  and  was  sold  for  more  than 
its  43^  per  cent  stock  brought  one  year  ago,  and  that  the  in- 
come yield  is  only  4.18,  much  lower  than  last  year's,  the 
sale  must  be  regarded  as  a  great  success,  which  undoubtedly 
resulted  from  taking  advantage  of  the  favorable  conditions 
of  the  investment  market.^  Owing  to  the  difficulty  of  mak- 
ing large  profits  in  business  and  the  consequent  accumula- 
tion of  bank  deposits,  the  investment  market  is  just  now 
looking  for  high-grade  securities  of  which  New  York  bonds 
furnish  a  striking  example. 

The  comptroller  does  not  always  go  into  the  money 
market  when  he  issues  notes  or  bills  to  raise  needed  funds. 
Roughly  two-thirds  of  the  corporate  stock  notes  issued  are 
sold  to  the  sinking  funds.  The  191 3  issue  of  $45,000,000  was 
to  fund  the  notes  issued  in  191 2,  of  which  about  $18,000,- 
000  were  held  by  the  sinking  funds.  The  former  practice 
was  for  the  sinking  fund  commissioners  to  bid  for  bonds 
when  a  sale  took  place,  just  the  same  as  any  other  bidder 
would  do.  That  was  before  the  use  of  the  corporate  stock 
notes.  The  present  practice  is  to  invest  the  sinking  fund 
money  in  the  city's  temporary  obligations  and  in  the  pur- 
chase of  the  city's  bonds  or  corporate  stock  in  the  market. 
This  last  feature  was  introduced  in  connection  with  the  bond 
sale  of  1913. 

C.    THE  NEW   METHOD  OF  SALE 

On  May  20,  19 13,  the  city  held  its  fourth  annual 
bond    sale    of    $45,000,000,    on    a  four    and    one-half    per 

*  Nciif  York  Herald,  April  16,  1914.  p.  7. 


389]  NEW  METHODS  OF  FINANCING  205 

cent  basis.  Under  the  law,  New  York  City  cannot 
sell  its  bonds  below  par  and  all  bids  must  be  sealed  and 
opened  in  public.  The  bids  received  amounted  to  $76,000,- 
000,  the  average  bid  being  100.159.  Consequently  the  sale 
was  heralded  as  a  success,  but  it  must  be  admitted  that  it 
was  only  a  qualified  success.  In  1912,  the  city  sold  its  $65,- 
000,000  bonds  at  4%  per  cent.  The  bids  received  were 
three  times  the  amount  offered,  and  the  average  bid  was 
100.747,  although  the  rate  of  interest  was  lower.  This 
illustrates  again  the  principle  formulated  in  a  preceding  sec- 
tion that  an  over-supply  of  bonds  depreciates  their  price. 

This  method  of  sale  was  editorially  denounced  by 
one  of  the  New  York  newspapers,  which  expressed  itself 
in  favor  of  adopting  a  direct  method  of  disposing  of  the 
city's  securities,  i.  c,  placing  the  bonds  directly  with  the  in- 
vestors or  selling  the  bonds  over  the  counter.  It  is  also 
claimed  that  the  city  officials  depend  too  much  upon  the 
banking  community  and  too  little  upon  the  patriotism  and 
thrift  of  the  people  themselves.  They  are  urged  to  adopt 
the  French  method  of  sale,  which  is  a  direct  disposal  of 
bonds  among  the  investors.  The  French  government  does 
not  call  in  the  aid  of  the  bankers  in  selling  its  bonds.  This 
is  true,  but  we  must  understand  that  all  the  people  of  France 
have  been  educated  for  many  years  in  investing  their  sav- 
ings in  government  securities.  Besides  the  French  bond 
sale  involves  a  lottery  principle  which  makes  the  securities 
attractive  to  the  people.  Thus,  the  prospectus  of  a  certain 
Paris  loan  of  May,  1912,  shows  that  3  per  cent  bond-:  is- 
sued at  95.  having  thirty-nine  years  to  run,  contained  the 
following  lottery  feature :  "  There  were  twelve  drawings 
up  to  and  including  1923,  where  one  bond  brought  200,- 
000  frs.,  one  10,000  frs.,  five  brought  1,000  frs.,  and 
thirty-fi-ve  500  frs.  each.  There  were  four  drawings  after 
1923  on  the  following  basis:  One  bond  at  100.000  frs..  one 


2o6  FINANCES  OF  THE  CITY  OF  NEW  YORK  [350 

at  10,000  frs.,  five  at  5,000  frs.,  and  thirty-five  at  500  frs. 
It  is  quite  evident  that  the  investment  basis  was  not  the 
first  consideration  in  bidding  for  so  confused  an  issue,  and 
that  the  lottery  principle  was  the  reason  for  the  popular  de- 
mand. Such  loans  usually  are  many  times  over-sub- 
scribed." ' 

The  implied  contrast  between  the  New  York  and  the 
French  method  of  selling  bonds  is  somewhat  misleading. 
The  New  York  method  is  both  direct  and  indirect.  Under 
the  laws  of  New  York  State,  the  City  is  required  to  sell  its 
bonds  to  the  highest  bidder,  who  may,  of  course,  be  an  in- 
dividual or  a  banking  syndicate.  The  latter  is  a  "  group  of 
men,  bankers,  or  any  combination  of  the  same,  who  com- 
bine their  actual  interests  for  the  purchase  or  control  of 
certain  properties  or  securities."  "  When  the  bonds  are  sold 
directly  to  individual  investors,  they  have  reached  their  ul- 
timate buyers,  and  the  sale  is  direct.  On  the  other  hand, 
when  the  bonds  are  bought  by  bond  houses,  banks  or  a  syn- 
dicate, to  be  ultimately  sold  to  the  public  with  a  certain  mar- 
gin of  profit,  they  have  not  reached  their  ultimate  buyers 
and  the  sale  is  indirect.  The  experience  of  the  city  shows 
that  the  major  portion  of  the  bonds  offered  is  purchased 
by  a  few  bond  houses,  or  banks,  and  then  sold  to  the  general 
public  as  the  investment  demand  develops.  This  raises  the 
question  whether  it  would  not  be  better  for  the  city  to  adopt 
the  direct  method  of  placing  the  bonds  with  the  ultimate  in- 
vestors without  the  medium  of  the  bankers  or  bond  houses. 
In  my  judgment  it  would  not,  since  the  present  method  is 
more  in  harmony  with  the  customs  and  wishes  of  American 
investors. 

*  Municipal  Financing,  an  address  by  Edmund  D.  Fisher,  at  an- 
nual convention  of  Investment  Bankers'  Association  of  America,  Oct. 
29,  1913. 

*  Rollins,  Money  and  Investment,  p.  391. 


391  ]  A'£^^  METHODS  OF  FINANCING  207 

The  American  people  are  differently  educated  from  the 
French  people.  They  are  in  the  habit  of  placing  their 
money  in  savings  banks.  They  prefer  to  put  their  money 
where  they  can  withdraw  it  in  time  of  need.  Even  the  re- 
quirement of  a  60  or  90  days'  notice  of  withdrawal  in  the 
case  of  a  savings-bank  deposit  is  more  satisfactory  to  the 
investor  than  simply  to  hold  a  government  security,  which 
he  is  obliged  to  turn  into  cash  in  case  of  need.  The  con- 
version of  this  piece  of  paper  is  rather  a  costly  operation 
to  him,  because  it  has  to  be  done  by  a  broker  at  his  expense. 
Added  to  this  is  the  more  undesirable  element  of  instability 
in  time  of  a  great  financial  stress.  It  may  be  sold,  but  at  a!. 
greatly  reduced  price. 

The  average  New-Yorker,  the  man  on  a  salary  who  is 
able  to  save  a  few  hundred  dollars  a  year,  would  rather  take! 
the  chance  of  quick  wealth  than  invest  his  money  in  safe 
New  York  City  bonds  at  a  good  rate  of  interest.  Yet  it  is 
an  undisputed  fact  that  only  one  out  of  several  hundred 
men  can  realize  his  dreams  of  enormous  wealth.  Every- 
one, however,  has  a  conviction  that  he  is  better  able  than 
his  fellows  to  select  good  things  and  that  he  will  meet  with' 
good  luck.  Nothing  could  illustrate  this  more  clearly  than 
a  comparison  of  two  issues,  made  in  191 1 — one  by  the  City 
of  Paris,  and  the  other  by  the  City  of  New  York.  The 
former  was  a  $70,000,000  issue  and  was  thirty-nine  timee 
over-subscribed.  A  very  large  proportion  of  it  went  to  the 
average  investors,  or  the  small  subscribers  from  the  country 
towns  and  villages  of  France.  In  strong  contrast,  the  bonds 
put  out  by  New  York  City  aggregated  $60,000,000.  which 
was  $10,000,000  less  than  the  issue  of  Paris.  Yet  the 
amount  of  over-subscriptions  was  only  four  and  one-half 
times  the  actual  issue  and  nearly  all  the  offers  came  from 
bankers  or  their  representatives.^ 

^  Collier's  Weekly,  article  by  Wm.  F.  Prendergast,  Comptroller  of 
New  York  City,  47,  34,  May  6,  191 1,  on  "  Why  the  Average  Man  Should 
Buy  New  York  City  Bonds." 


2o8  FINANCES  OF  THE  CITY  OF  NEW  YORK  [30)2 

The  last  bond  sale  of  the  City  of  New  York  was  adver- 
tised ail  over  the  country.  But  there  was  no  indication 
whatever  that  the  sale  was  popularized  to  any  extent.  One 
recent  bond  sale  of  Philadelphia  over  the  counter  was  her- 
alded as  a  great  success,  but  a  study  of  the  bids  indicates  no 
popular  interest  in  this  sale.  For  instance,  of  the  entire 
offering  of  $7,000,000,  about  $4,150,000  was  subscribed 
for  by  591  subscribers,  while  the  population  of  the  city  had 
reached,  in  19 10,  1,549,008.  The  subscriptions  varied  from 
$100  upwards,  but  the  commissioners  of  the  sinking  fund 
of  Philadelphia  bought  the  city  bonds  to  the  amount  of 
$1,225,000.  Among  the  bidders  were  twenty-five  banks  and 
trust  companies,  sending  in  an  aggregate  bid  of  $1,015,000. 
It  was  reported  that  Mayor  Blankenburg,  in  apprehension 
of  the  possible  failure,  called  upon  a  leading  banking  house 
to  arouse  popular  interest  in  the  sale  just  after  the  first 
day's  experience.  One  of  the  methods  employed  was  to  in- 
duce the  banks  which  had  been  selected  by  the  city  as  the 
depositories  of  the  city's  funds  to  bid  for  a  part  of  the 
bonds.  The  result  was  that  of  the  entire  amount  of  $4,- 
150,000,  the  total  popular  subscription  was  only  $1,910,000.^ 

It  will  be  recalled  that  during  President  Cleveland's  ad- 
ministration he  was  seriously  criticized  by  the  public  for 
selling  United  States  bonds  to  a  banking  syndicate.  This 
led  him  to  attempt  to  popularize  the  next  sale.  Those  who 
conducted  the  sale  claimed  that  it  was  a  great  success,  but 
an  analysis  of  the  figures  of  the  sale  does  not  justify  such  a 
claim.  For  instance,  the  entire  offering  amounted  to  $100,- 
000.000  at  4  per  cent,  and  was  over-subscribed  over  five 
times.  The  whole  nation  furnished  4,635  bids,  of  which 
only  818  bids  w^re  finally  accepted.     About  $63,000,000  of 

'  See  an  address  on  Tendencies  in  Municipal  Credit,  by  Wm.  F. 
Prendergast,  Comptroller  of  the  City  of  New  York,  before  the  Na- 
tional Association  of  Credit  Men,  June  18.  1913. 


393]  ^^^^  METHODS  OF  FINANCING  209 

bonds  went  to  the  general  public,  while  the  remainder  went 
to  a  syndicate  headed  by  Messrs.  J.  P.  Morgan  &  Company, 
who  over-bid  the  large  mass  of  subscribers. 

Speaking  of  the  difficulty  of  making  a  popular  sale,  Presi- 
dent Cleveland,  in  his  Presidential  Problems,  says: 

It  was  difficult  for  an  ordinary  person  to  make  the  rather 
confusing  computation  of  premium  and  other  factors  neces- 
sary to  a  safe  and  intelligent  bid.  In  a  transaction  of  this  sort, 
when  the  smallest  fraction  of  a  cent  may  determine  the  success 
of  an  offer,  those  accustomed  to  the  niceties  of  financial  cal- 
culations are  apt  to  hold  the  field  to  the  exclusion  of  many, 
who,  unaided,  dare  not  trust  themselves  in  the  haze  of  such 
intricacies. 

Thus,  the  method  of  direct  sale  of  bonds  can  hardly  be 
adopted  by  the  cities  of  the  United  States.  They  cannot 
adopt  the  lottery  principle,  as  it  is  against  the  moral  senti- 
ment of  the  people.  They  have  not  the  necessary  facilities 
for  placing  their  securities  directly  with  the  investors.  If 
they  were  to  employ  a  large  force  of  salesmen  to  make  use 
of  extensive  advertising,  in  order  to  sell  the  bonds  over  the 
counter,  they  would  incur  a  cost  far  in  excess  of  the  small 
profits  now  realized  by  the  bankers.  Under  the  recent  tight 
money  conditions,  attempts  were  made  by  certain  cities,  or 
on  their  behalf  by  merchandising  houses,  to  sell  bonds  over 
the  counter,  but  the  percentage  of  successful  sales  made  in 
this  way  has  been  comparatively  small  and  emphasizes  the 
fact  that  a  banking  house  equipped  to  do  this  business  is  a 
necessary  element  in  municipal  financing. 

Furthermore,  the  American  experience  with  bond  adver- 
tising shows  a  material  increase  in  the  cost  during  recent!( 
years  through  an  effort  to  broaden  the  market  for  municipal 
securities.  Unfortunately,  the  results  are  not  compatible 
with  the  increased  cost.    Tlie  American  mind  does  not  seem 


210  FINANCES  OF  THE  CITY  OF  NEW  YORK  [3^4 

to  be  psychologically  influenced  even  by  the  cleverest  ad- 
vertising. A  great  deal  of  reliance  is  still  placed  upon  the 
salesmanship  of  bond  houses,  as  the  principal  agents  of  dis- 
tribution of  municipal  bonds.  In  European  practice,  exten- 
sive advertising  is  frequently  employed  by  banks  offering 
public  issues. 

I  have  thus  proven  the  difficulty  and  inadvisability  of 
adopting  the  new  method  of  selling  the  city's  bonds  without 
the  medium  of  the  banking  houses.  The  men  who  urge  its 
adoption  certainly  have  the  welfare  of  the  city  at  heart,  buti 
not  knowing  the  details  of  bond  sales  in  the  United  States, 
they  fail  to  convince  the  public  officials  of  the  feasibility  of 
their  plan. 

D.    NEW  METHOD  OF  MAINTAINING  THE  SINKING  FUNDS 

I.  Hozu  a  Sinking  Fund  is  Established. — In  the  cities  where 
bonds  are  issued  on  the  sinking-fund  method,  no  part  of  the 
principal  is  paid  to  the  holders  or  investors  during  the  years 
they  are  to  run.  The  full  amount  of  interest  on  the  prin- 
cipal is  annually  collected  and  paid  to  the  creditors,  but  a 
portion  of  the  principal  is  annually  provided  for  by  the 
budget  and  paid  into  an  account  known  as  the  "  Sinking 
Fund  ",  the  fund  being  invested  at  a  certain  rate  of  interest. 
If  compounded  at  the  rate  yearly  or  half-yearly  during  the 
term  of  the  bonds,  the  fund  will  grow  in  size  until  it  will  be 
sufficient  to  wipe  out  the  entire  debt  at  maturity. 

It  may  perhaps  be  well  to  point  out  here  the  different  cir- 
cumstances under  which  the  national  and  municipal  sinking 
funds  are  established  and  maintained.  The  former  are 
created  out  of  the  national  revenues  which  are  almost  en- 
tirely derived  from  indirect  taxation.  The  revenues  are 
uncertain  in  amount  and  it  is  very  difficult  to  make  the  bud- 
getary appropriations  and  treasury  receipts  meet.  The 
budget  may  call  for  more  or  less  than  the  annual  treasury 


395]  NEW  METHODS  OF  FINANCING  211 

receipts  can  provide,  with  the  inevitable  consecjuence  of  a 
surplus  in  the  one  case  or  a  deficit  in  the  other.  If  it  is  not 
an  obligatory  or  mandatory  function  for  the  government' 
annually  to  provide  a  sum  of  money  for  the  sinking  fund, 
it  might  be  appropriated  for  more  urgent  exigencies  of  cur- 
rent expenditure  and  the  sinking  fund  be  thus  hindered 
from  growth.  If,  on  the  other  hand,  the  government  is 
under  obligation  annually  to  set  aside  a  sum  of  money  for 
the  sinking  fund,  it  might  result  in  cutting  short  the  appro- 
priations for  other  urgent  needs  and  borrowing  money  to 
cover  up  the  deficiency.  In  other  words,  faithful  redemp- 
tion of  old  debts  might  lead  to  the  incurring  of  new  debts, 
even  at  a  higher  rate  of  interest.  This  is  precisely  what 
happened  in  England  during  the  period  of  heavy  borrowing, 
1 785-1829,  when  about  three  hundred  and  thirty  million 
pounds  sterling  were  borrowed  at  about  five  per  cent,  in 
order  to  redeem  the  same  amount  of  debt  at  four  and  one- 
half  per  cent,  resulting  in  an  annual  interest  loss  of  £1,- 
627,765  for  forty-three  years.^  All  this  illustrated  suc- 
cinctly the  fundamental  causes  underlying  the  repeated 
changes  of  policy  relating  to  the  maintenance  of  sinking 
fund  both  by  the  British  and  the  United  States  govern- 
ments. 

On  the  contrary,  in  the  municipalities  of  to-day,  the  sink- 
ing funds  are  created  out  of  the  revenues  derived  from 
direct  taxation,  which  are  flexible  in  amount,  i.  e.,  if  the  bud- 
getary appropriations  increase,  the  amount  of  revenue  can 
be  made  to  increase  through  the  medium  of  the  tax  rate  and 
vice  versa.  In  this  way  the  difficulties  of  treating  a  surplus 
and  meeting  a  deficit  are  removed,  and  the  causes  which 
give  rise  to  temporary  suspensions  of   debt  amortization 

'  See  an  article  on  "  The  Sinking  Funds  of  the  City  of  New  York," 
by  Edgar  Levy,  in  Municipal  Affairs,  vol.  iv,  no.  4,  Dec,  1900,  pp.  1-3, 


212  FINANCES  OF  THE  CITY  OF  NEW  YORK  [3^5 

and  uncertainties  of  sinking-fund  policies,  as  seen  in  the 
national  government,  are  wholly  absent. 

II.  Present  Sinking  Funds  of  Neiv  York  City. — There 
are  ten  sinking  funds  in  the  City  of  New  York,  established 
under  the  above  method.  Three  were  established  by  the  old 
City  of  New  York,  two  under  the  present  charter,  and  the 
other  five  came  through  the  annexation  of  Brooklyn  and 
Long  Island  City.  The  ten  sinking  funds,  with  their  re- 
sources, are  as  follows  : 

(i)  Sinking  fund  for  the  redemption  of  the  city  debt  No.  i 
(of  the  old  City  of  New  York).  The  resources  of  this  fund 
consist  of  various  revenues  pledged  to  it  by  ordinances  and 
statutes,  such  as  dock  and  ship  rent,  interest  on  deposits, 
licenses,  market  rent,  railroad  franchises,  permits  for  street 
vaults  and  the  income  from  the  investment  thereof. 

(2)  Sinking  fund  for  the  redemption  of  the  city  debt  No.  2 
(the  Water  Sinking  Fund  of  the  old  City  of  New  York).  The 
resources  of  this  fund  consist  of  annual  installments  raised 
by  taxation  sufficient  in  amount  with  the  accumulation  of  in- 
terest thereon  at  3  per  cent  per  annum  to  meet  its  liability. 

(3)  Sinking  fund  for  the  payment  of  interest  on  the  city 
debt  of  the  old  City  of  New  York.  The  resources  of  this  fund 
•consist  of  the  various  revenues  pledged  to  it  by  ordinances 
and  statutes,  such  as  court  fees  and  fines,  Croton  water  reve- 
nue, ferry  rents  and  house  rent,  etc.  The  surplus  revenues  of 
this  fund  are  by  law  transferred  to  the  sinking  fund  for  the 
redemption  of  city  debt  No.  i  (old  City  of  New  York). 

(4)  Sinking  fund  of  the  City  of  New  York  created  by  the 
Greater  New  York  Charter.  The  resources  of  this  fund  con- 
sist of  the  annual  installments  raised  by  taxation  sufficient  in 
amount  with  an  accumulation  of  interest  thereon  at  3  per  cent 
per  annum  to  meet  its  liability. 

(5)  Water  Sinking  Fund  of  the  City  of  New  York  created 
by  the  Greater  New  York  Charter.  The  resources  of  this 
fund  consist  of  annual  installments  raised  by  taxation,  suffi- 


397]  -^'^^^  METHODS  OF  FINANCING  213 

cient  in  amount  with  the  accumulation  of  interest  thereon  at 
3  per  cent  per  annum  to  meet  its  liability. 

(6)  Sinking  Fund  of  the  City  of  Brooklyn  (of  the  old  City 
of  Brooklyn).  The  resources  of  this  fund  consist  of  annual 
installments  raised  by  taxation  and  accumulation  of  interest 
thereon  to  meet  its  liability,  and  in  addition  thereto  the  income 
from  bonds  and  mortgages  held  by  the  city  which  are  liens 
upon  so-called  East  Side  Park  Lands,  assessments  collected  for 
account  of  Prospect  Park  and  its  share  of  surplus  revenue  of 
the  New  York  and  Brooklyn  Bridge. 

(7)  Water  Sinking  Fund  of  the  City  of  Brooklyn  (of  the 
old  City  of  Brooklyn).  The  resources  of  this  fund  consist  of 
water  revenues  collected  in  the  Borough  of  Brooklyn  in  ex- 
cess of  the  amount  thereof  required  for  the  payment  of  inter- 
est on  water  bonds  issued  for  account  of  the  Brooklyn  water 
system  and  the  annual  cost  of  the  maintenance  and  extension 
of  the  system. 

(8)  Sinking  Fund  of  Long  Island  City  for  the  redemption 
of  revenue  bonds.  The  resources  of  this  fund  consist  of  the 
amounts  collected  on  account  of  arrears  of  taxes  in  Long 
Island  City  imposed  prior  to  1896. 

(9)  Sinking  Fund  of  Long  Island  City  for  the  redemption 
of  fire  bonds.  The  resources  of  this  fund  consist  of  an  annual 
installment  raised  by  taxation  sufficient  in  amount  with  its 
accumulation  of  interest  to  meet  its  obligation. 

(10)  Sinking  Fund  of  Long  Island  City  for  the  redemption 
of  water  bonds.  The  resources  of  this  fund  consist  of  annual 
installments  raised  by  taxation  sufficient  in  amount  with  its 
accumulation  of  interest  to  meet  its  obligation. 

Sinking  funds  8,  9  and  10  are  insignificant  in  amount.^ 

III.  EqiiaUzation  of.  Burdens  betiveen  Present  and  Future 
Taxpayers. — In  many  cities  in  the  United  States,  the  annual 
portion  of  the  principal  to  be  paid  out  of  revenue  into  the 

'  See  a  pamphlet,  New  York  City  Bonds — A  Premier  Security,  pub- 
lished by  the  National  City  Bank  of  New  York,  1907,  pp.  14-16. 


214  FINANCES  OF  THE  CITY  OF  NEW  YORK  [398 

sinking-fund  account  is  not  scientifically  calculated,  so  that 
when  the  bonds  mature,  the  sinking  fund  is,  as  a  general 
rule,  more  than  sufficient  to  redeem  them.  As  this  method 
would  leave  an  excess  in  the  fund,  it  should  be  condemned, 
because  it  has  the  effect  of  taking  out  of  the  pockets  of  the 
taxpayers  each  year  more  money  than  is  actually  needed. 
For  instance,  in  the  case  of  the  sinking  fund  for  the  redemp- 
tion of  the  New  York  City  Debt  No.  i,  the  revenue  pledged 
would  yield  a  large  surplus  over  and  above  the  amount  re- 
quired for  the  amortization  of  its  obligations.  The  surplus 
would  be  so  large  that  in  1928,  when  the  final  obligation 
will  be  due,  there  would  be  on  hand  in  that  fund  nearly 
$300,000,000  in  excess  of  the  amount  required  to  redeem 
the  obligations.  This  excess  will  be  invested  in  the  corpor- 
ate stock  of  the  City  of  New  York  and  according  to  the  law 
it  will  then  be  cancelled.^  As  a  result,  the  collection  of 
money  from  the  taxpayers  to  pay  the  annual  amortization 
installment  and  interest  charges  on  $300,000,000  corporate 
securities  will  suddenly  cease  in  1929  and  "  the  budget  of 
that  year  will  be  some  $16,000,000  less  than  in  the  years 
previous.  This  is  a  delightful  prospect  for  the  taxpayers 
of  1929."  This  benefit  will  be  given  to  them  at  the  expense 
of  present  taxpayers  who  are  bearing  the  increased  burden 
of  taxation  to  provide  a  sufficient  fund  to  redeem  the  obli- 
gations in  1929.  The  proper  method  of  equalizing  the  bur- 
den of  the  taxpayers  of  the  years  before  1929  and  those  of 
the  years  after  1929  would  be  to  appropriate  the  excess  of 
each  year  for  the  reduction  of  taxation  instead  of  pledging 
and  appropriating  it  to  the  sinking  fund  No.  i. 

But  any  attempt  to  appropriate  and  use  the  excess  of 
revenue  to  reduce  the  burden  of  taxation  would  amount  to 
a  breach  of  the  contract,  sanctioned  by  the  Act  of  1878,  pro- 

'  Section  206,  Greater  New  York  Charter. 


299]  ^^^'^  METHODS  OF  FINANCING  215 

viding  that  all  the  revenues  so  described  shall  be  paid  into 
the  sinking  fund  until  all  the  obligations  of  that  fund  were 
redeemed.  This  situation,  however,  is  adequately  met  by 
the  creation  of  a  new  class  of  securities  known  as  the  Gen- 
eral Fund  Bonds,  issued  by  the  city  and  held  by  the  sinking 
fund  commissioners,  to  the  amount  of  the  excess  revenue. 
The  proceeds  of  the  issue  go  to  the  general  fund  to  reduce 
taxation.  It  may  be  reasonably  asked  why  does  the  city  not 
transfer  the  excess  revenues  to  the  current  account  in  cash, 
and  what  is  the  use  of  issuing  general-fund  bonds  in  order 
to  get  cash  ?  The  answer  to  these  questions  is  that  there  is  a 
contract,  according  to  the  Act  of  1878,  existing  between 
the  city  and  the  creditors,  providing  that  all  the  revenues 
therein  described  shall  be  pledged  to  the  sinking  fund  No.  i. 
Therefore  the  excess  revenues  cannot  be  transferred  in 
cash ;  they  can  be  appropriated  and  used  for  the  reduction 
of  taxation  only  through  the  medium  of  the  general- fund 
bonds,  which  must  be  bought  and  held  by  the  sinking-fund 
commissioners,  in  order  to  guarantee  the  same  security  to 
the  bondholders  as  if  the  excess  revenues  were  still  part  of 
the  sinking  fund.  These  bonds  are  an  obligation  of  the 
City  of  New  York  just  the  same  as  all  other  bonds  issued 
by  the  city  are.^ 

They  bear  interest  at  a  rate  not  exceeding  4  per  cent,  nor 
more  than  the  then  rate  on  sinking-fund  investments,  and 
are  to  be  cancelled  in  1929.  The  commissioners  of  the 
sinking  fund  have  the  power  to  dispose  of  the  general-fund 
bonds  to  the  public  in  the  event  of  the  revenues  of  this  sink- 
ing fund  being  insufficient  to  provide  the  necessary  annual 
installment.  ^ 

^  See  a  pamphlet  called  As  to  the  Legality  of  the  Plan  to  Relieve 
Taxation  in  New  York  City,"  by  Edgar  J.  "Levy,  published  by  the  De- 
partment of  Finance,  Xew  York  Ctiy,  1902. 

"  See  Municipal  Year  Book  of  the  City  of  New  York,  1913,  p.  32.   For 


2i6  FINANCES  OF  THE  CITY  OF  NEW  YORK  [400 

IV.  Serial  Bond  Method  v.  Sinking  Fund  Method. — 
Sound  municipal  financing  requires  sound  methods  in  the 
creation  of  sinking  funds,  or  in  the  amortization  of  debt  in- 
curred. Until  recently  the  practice  in  New  York  in  this  re- 
spect had  been  unsound,  and  as  a  result,  there  have  been  ad- 
vanced many  arguments  in  favor  of  the  substitution  of  the 
sinking-fund  method  by  the  serial-bond  method  of  amor- 
tization. The  latter  provides  for  the  payment  of  a  stipu- 
lated portion  of  the  principal  each  year,  in  addition  to  the 
interest  on  the  issue  outsanding  from  year  to  year.  The 
serial  form  undoubtedly  is  the  best  type  of  bond  for  small 
municipalities,  where  the  issues  are  not  large  and  where 
series  of  bonds  may  be  taken  by  individual  investors.  In 
the  case  of  large  cities,  it  will  be  objectionable  owing  to  the 
difficulty  of  disposing  of  such  bonds. 

The  sinking-fund  method  of  bond  issue  originated  be- 
cause investors  were  averse  to  buying  bonds  which  provided 
for  the  return  yearly  of  a  portion  of  the  principal,  necessi- 
tating the  reinvestment,  annually,  of  small  amounts.  At 
any  rate,  debentures  of  the  latter  class  brought  a  less  price 
in  the  market;  hence  the  sinking-fund  idea  was  introduced 
to  place  the  onus  of  reinvestment  upon  the  shoulders  of  the 
municipality  or  corporation  obtaining  the  loan,  thus  giving 
the  investors  the  advantage  of  a  longer,  more  permanent 
and  to  him  more  satisfactory  investment.  As  a  great  bor- 
rower, New  York,  of  course,  must  issue  its  securities  in  the 
form  which  will  find  most  favor  in  the  bond  market,  which 
has  a  great  objection  to  the  method  of  annual  redemption. 
Furthermore,  from  the  taxpayer's  point  of  view,  the  s-^rial 
bond  is  objectionable  because  of  the  wide  variations  in  the 
annual  appropriations,  and  the  burden  does  not  therefore 
fall  equally  upon  him  from  year  to  year. 

a  detailed  account  of  the  sinking  fund  for  the  redemption  of  city 
debt  No.  I,  see  Mr.  Edgar  J.  Levy's  "'  Sinking  Fund  of  New  York  City,'* 
1900. 


40l]  -V£f^'  METHODS  OF  FINANCING  217 

On  the  other  hand,  even  to  a  large  city,  the  serial  bond 
has  an  obvious  value.  It  saves  interest  and  does  not  re- 
quire the  provision  of  a  sinking  fund.  Interest  is  saved 
because  the  principal  is  paid  off  each  year  in  equal  annual 
installments  included  in  the  tax  levy.  No  sinking-fund 
provision,  therefore,  is  necessary.  For  the  first  fourteen 
years  of  a  fifty-year-serial-bond  issue  maturing  in  equal  in- 
stallments, the  debt-service  charges  would  be  more  than  the 
charges  for  fifty-year  bonds  amortized  by  a  sinking  fund.^ 
On  the  fifteenth  year  and  on  each  year  thereafter,  when 
the  redemption  of  the  bond  cuts  off  interest  payments,  the 
annual  charges  on  serial  bonds  would  grow  steadily  less 
than  the  charges  for  interest  and  sinking-fund  installments 
on  the  fifty-year  term  bonds. 

To  make  the  serial  bond  attractive  to  the  investors,  it  is 
suggested  that  they  may  be  issued  in  series  falling  due  at 
five-year  intervals.  Thus,  the  first  installment  will  fall  due 
at  the  end  of  five  years;  the  second,  at  the  end  of  ten  years ; 
the  third,  at  the  end  of  fifteen  years ;  and  so  on.  This  plan 
would  materially  decrease  the  objectionable  feature  of  re- 
turning each  year  a  small  portion  of  the  principal  and  neces- 
sitating its  reinvestment. 

A  good  suggestion  has  been  made  that  the  city  should 
have  the  right  to  redeem  its  own  bonds  to  be  issued  here- 
after, any  time  before  they  become  due,  after  a  period  of 
ten  or  twenty-five  years  from  the  date  of  issue.  This  plan 
would  save  the  city  a  large  amount  of  interest,  when  it  was 
financially  able  to  redeem  the  bonds  considerably  before  ma- 
turity. It  must  be  remembered,  however,  that  a  bond  of 
this  type  sells  at  less  advantage  to  the  city,  because  the  bid 

'  See  a  pamphlet  entitled,  No  Matter  Who  Is  Elected — No.  25,  pub- 
lished by  the  New  York  Bureau  of  Municipal  Research,  Nov.  8,  1913. 
It  contains  also  some  excellent  sugestions  relating  to  the  treatment  of 
sinking  funds  and  establishment  of  depreciation  funds. 


2i8  FINANCES  OF  THE  CITY  OF  NEW  YORK  [402 

is  based  upon  the  assumption  that  the  bonds  are  to  be  re- 
deemed considerably  before  maturity.  The  issue  of  such 
bonds  when  the  interest  rate  is  very  high  is  advantageous, 
provided  that  the  city  may  refund  them  at  more  advan- 
tageous rates  when  they  become  redeemable.^ 

The  new  method  which  Comptroller  Prendergast  has  re- 
cently devised  and  for  which  special  legislation  is  necessary, 
admits  of  issuing  ten-year  serial  bonds,  thereby  replacing 
the  fifty-year  long-term  bonds. 

The  following  illustration  of  the  method  serves  to  show 
its  efficacy. 

Upon  the  assumption  that  the  city  has  absolutely  nec- 
essary improvements  to  make,  involving  an  outlay  of  $50,- 
000,000,  the  sum  is  borrowed  on  the  corporate-stock  notes, 
with  the  provision  that  an  installment  of  one-tenth  of  it  is 
to  be  included  each  year  for  ten  years  in  the  annual  tax  bud- 
get and  a  corresponding  amount  of  the  notes  is  to  be  annu- 
ally retired.  A  comparison  of  this  new  method  of  borrow- 
ing, with  the  present  method  of  issuing  long-term  bonds, 
brings  out  a  wonderful  result.  To  illustrate,  an  issue  of 
$50,000,000  of  short-term  notes  at  4  per  cent,  to  be  paid 
during  the  next  ten  years  in  ten  annual  budget  installments, 
including  principal  and  interest,  would  represent  an  aggre- 
gate oultay  by  the  city  during  that  period  of  $61,000,000, 
but  at  the  end  of  that  time,  the  indebtedness  would  be  com- 
pletely discharged.  On  the  other  hand,  if  the  city  were  to 
issue,  as  has  been  the  practice,  $50,000,000  of  fifty-year 
bonds  at  4^  per  cent,  the  interest  on  them  would  amount 
to  $112,500,000,  and  the  amortization  charges,  $22,163,750. 
These  two  amounts  aggregate  $134,663,750,  which  is  the 
cost  of  such  a  $50,000,000  fifty-year  bond  issue.  A  com- 
parison of  this  cost  with  that  of  a  ten-year  serial  bond  issue 

'  No    Matter  Who  is  Elected,  oP.  cit. 


403]  ^'Ell'  METHODS  OF  FINANCING  219 

gives  a  difference  of  $71,663,750/  which  is  saved  for  the 
city.  A  bill  which  would  authorize  the  city  to  carry  out  this 
plan  has  already  been  drawn  under  the  direction  of  the 
comptroller. 

V.  Changes  in  Sinking  Fund  Investments. — The  prin- 
ciples involved  in  the  general  subject  of  sinking-fund  amor- 
tization are  simple  and  may  be  stated  as  follows : 

(i)  A  sinking  fund,  as  stated  in  a  preceding  section,  is 
so  established  that  the  annual  installment,  compounded 
yearly  or  half-yearly  at  a  certain  rate,  will  be  sufficient  to 
redeem  the  principal  at  maturity,  in  nothing  but  cash. 

(2)  The  use  of  the  sinking-fund  money  for  investments, 
therefore,  involves  the  idea  that  the  investments  may  be 
readily  sold  for  cash  prior  to  the  maturity  of  the  bonds  to 
be  redeemed. 

(3)  If  the  investments  are  made  in  the  new  city  bonds 
which  will  mature  long  after  the  cash  invested  is  needed 
for  the  redemption  of  the  old  bonds,  they  are  not  available 
for  the  purpose  of  amortization.  Even  when  investments 
are  made  in  the  old  issues,  they  should  be  in  such  old  issues 
as  will  mature  prior  to  the  issues  which  they  are  presumed 
to  amortize.  On  the  other  hand,  if  the  investments  are  made 
in  the  issues  maturing  after  the  cash  so  invested  is  required 
for  use,  it  is  an  unsound  practice,  because  it  is  impracticable 
to  sell  such  bonds.  Any  attempt  to  sell  bonds  of  this  char- 
acter to  the  public  would  disturb  the  security  markets  and 
seriously  interfere  with  current  financing.  Therefore,  the 
practice  of  investing  the  sinking-fund  moneys  either  in  the 
new  issues  or  in  the  issues  maturing  after  the  cash  is  needed 
for  use,  will  eventually  cause  a  great  crisis  when  it  is  nec- 

*  See  an  address  on  "  Change  in  the  Policy  of  Long  Term  Borrov/- 
ing,"  delivered  to  the  New  York  Credit  Men's  Association  at  the  Hotel 
Astor,  by  Comptroller  Prendergast,  Jan.  15,  1914. 


220  FINANCES  OF  THE  CITY  OF  XEJV  YORK  [404 

essary  to  secure  cash  from  the  taxpayers  for  the  purpose 
of  amortizing  the  original  debt/ 

(4)  The  sinking  funds  can  be  invested  only  in  the  evi- 
dence of  city  debt,"  because  the  bonds  of  other  cities  may 
lack  stability  and  safety.  The  best  way  of  making  the  sink- 
ing-fund investments  is  either  in  the  city's  short-term  obli- 
gations, which  are  continually  being  redeemed  from  reve- 
nues and  payment  of  which  will  incur  no  additional  burden 
upon  the  public,  or  in  the  purchase  of  bonds  in  the  hands  of 
the  public  which  it  is  incumbent  upon  the  sinking-fund  com- 
mission to  amortize — i.  c,  in  the  purchase  of  the  bonds  of 
the  specific  issue  to  be  paid.  If  this  latter  principle  was  car- 
ried out  year  by  year,  on  a  pro-rata  basis,  there  would  be 
no  accumulation  of  debt  maturing  at  one  time,  because  the 
only  portion  becoming  due  at  the  end  of  the  term — for  in- 
stance, the  fiftieth  year  of  a  fifty-year  bond — would  equal 
only  one-fiftieth  of  the  original  debt,  the  preceding  forty- 
nine  proportionate  portions  having  been  amortized  by  the 
previous  annual  purchases. 

Students  of  bond  investments  have  severely  criticised 
municipalities  for  purchasing  their  own  bonds  in  order  to 
keep  them  alive  in  the  sinking  fund.  Besides  New  York, 
there  are  many  other  cities  which  recpiire  the  sinking-fund 
cash  to  be  invested  in  nothing  but  their  own  bonds.  If 
these  bonds,  when  bought  back,  were  cancelled,  the  effect 
would  be  the  same  as  if  the  municipality  had  reduced  its 
debt.  But  if  the  bonds,  when  bought  back,  are  still  tied  up 
in  the  sinking  fund,  such  a  policy  is  in  direct  violation  of 
sound  economic  principles.  If  a  man  borrows  money  on  his 
note  and  later  redeems  it  by  paying  back  the  money  bor- 

'  An  address  on  "  Municipal  Financing."  by  Edmund  Fisher,  deliv- 
ered at  annual  convention  of  the  Investment  Bankers'  Association  of 
America,  Oct.  29,  1913. 

'^Municipal  Year  Book  of  Nezv  York  City,  1913,  p.  33. 


405]  ^^^  METHODS  OF  FINANCING  221 

rowed,  he  ought  to  offset  it  against  the  debt.  The  note 
ought  to  be  automatically  cancelled.  If  instead  of  cancelling 
it,  he  keeps  it  and  considering  himself  as  owing  himself  the 
sum,  pays  himself  the  same  interest  as  before  until  the  note 
falls  due,  everybody  would  think  him  a  fit  subject  for  the 
psychopathic  ward.  Such  a  policy,  however,  has  become  a 
common  practice  with  American  cities.^  Further,  sound 
economic  principles  require  the  sinking  fund  to  be  taken 
care  of  by  men  out  of  touch  with  the  borrower,  because  in 
that  case  it  is  entirely  beyond  the  power  of  the  debtor  tO' 
minimize  the  security  of  the  loan.  On  the  other  hand,  if 
the  sinking  fund  is  invested  in  the  borrower's  own  bonds  or 
obligations,  it  gives  the  creditor  no  additional  security  what- 
ever. "  It  is  a  worthless  device,  so  far  as  he  is  concerned."  " 
He  will  be  best  secured  by  using  the  sinking-fund  money  in 
the  purchase  of  various  high-grade  bonds,  which  are  far 
removed  from  the  control  of  the  borrowing  corporation. 
On  this  ground,  the  funds  of  Providence,  Rhode  Island, 
may  be  invested  in  the  bonds  of  the  Federal  Government, 
of  the  State  Governments  of  New  England,  of  the  cities  of 
Rhode  Island,  and  of  sixteen  other  cities  of  very  high  credit. 
But  "  the  bonds  of  each  of  said  cities  shall  be  a  lawful  in- 
vestment, only  so  long  as  its  indebtedness,  less  its  water 
debt  and  sinking  funds,  shall  not  exceed  7  per  cent  of  the 
assessed  valuation.^ 

The  results  we  have  thus  far  reached  in  this  and  the  pre- 
ceding sections,  may  be  summarized  as  follows : 

(i)  The  use  of  the  serial-bond  principle  in  place  of  the 
sinking-fund  principle  is  desirable  for  small  cities  only. 

(2)   The  strict  application  of  the  amortization  principle. 

1  Lawrence  Chamberlain,  Principles  of  Bond  Investment,  pp.  213-214. 
Henry  Holt  &  Co. 

2  Chandler,   The  Metropolitan  Debts  of  Boston  and  Vicinity. 

*  Lawrence  Chamberlain,  Principles  of  Bond  Investment,  p.  215. 


222  FINANCES  OF  THE  CITY  OF  NEW  YORK  [406 

or  what  is  the  same  thing,  the  principle  of  "  killing  "  the 
debt  in  a  scientific  manner  is  twofold : 

(a)  The  adoption  of  a  prearranged  plan  of  calling  and 
paying-ofT  bonds  at  stated  intervals,  or 

(b)  The  application  of  the  sinking-fund  cash  to  purchas- 
ing bonds  from  time  to  time,  preferably  during  the  periods 
of  depression. 

In  New  York  City  the  last  principle  has  recently  been 
applied.  To-day,  the  city  goes  into  the  market  to  take  up 
the  bonds  outstanding  in  the  interest  of  the  sinking  funds. 
The  sinking-fund  commissioners  naturally  accept  the  ten- 
ders most  favorable  to  the  city  from  the  public.  As  the 
bonds  are  purchased  during  the  period  of  depression  in 
order  to  get  a  low  price,  the  effect  will  be  to  keep  up  the 
prices  of  the  bonds  in  general.  It  was  probably  with  this 
end  in  view  that  when  the  191 3  sale  of  $45,000,000  4^4  per 
cent  bonds  was  made  known,  the  comptroller,  as  a  member 
of  the  sinking-fund  commission,  announced  that  he  would 
purchase,  for  the  account  of  the  sinking  funds,  on  or  after 
June  2,  1913,  city  bonds  or  stock  then  held  by  the  public  to 
the  amount  of  $5,000,000,  giving  preference  to  such  tenders 
as  are  on  a  basis  most  favorable  to  the  city.  Instead  of 
buying  part  of  the  new  issue,  the  city  bought  in  older  bonds. 
The  effect  of  this  buying  was  calculated  to  benefit  the  city 
in  two  ways.  If  the  new  bond  sale  would  depress  prices  of 
outstanding  bonds,  bearing  lower  rates  of  interest,  the  city 
would  buy  them  up  at  comparatively  low  price.  On  the 
other  hand,  the  offer  might  result  in  keeping  up  the  price  of 
outsanding  issues. 

The  sinking  fund,  even  after  the  purchase  of  $5,000,000 
of  city  bonds,  on  or  after  June  2,  1913,  contained  about 
$28,000,000  in  cash,  owing  to  the  fact  that  they  contained 
$28,000,000  of  corporate-stock  notes,  which  were  paid  off 
from  the  proceeds  of  the  new  bond  issue.     The  May  issue 


^07]  ^^'^^^  METHODS  OF  FINANCING  00 ^ 


—  O 


of  19 1 3,  therefore,  threw  about  $28,000,000  of  cash  into 
the  sinking  funds/  and  put  them  in  shape  to  buy  new  notes 
and  bills,  if  the  city  would  issue  them  in  anticipation  of  the 
next  sale  of  bonds  and  in  anticipation  of  the  next  semi- 
annual payment  of  taxes.  This  makes  the  comptroller  prac- 
tically independent  of  the  money  market  for  several  months. 
He  could  sell  his  notes  and  bills  to  the  sinking  funds  if  the 
rates  in  the  market  rise  as  they  are  likely  to  do  in  the 
harvesting  season  at  the  end  of  summer. 

This  practice  of  buying  in  bonds  nearest  the  dates  of  ma- 
turity has  almost  revolutionized  the  old  unsound  method 
of  using  the  sinking-fund  cash,  which  consisted  in  purchas- 
ing new  city  bonds  for  sinking-fund  investment  at  the  time 
of  their  issue,  thereby  deferring  for  twenty  or  fifty  years 
the  return  of  cash  for  use  in  redeeming  outstanding  bonds. 
In  addition  to^  this  advantage,  by  shortening  the  period  of 
investment,  it  will  greatly  simplify  the  problem  of  the  sink- 
ing-fund commissioners  in  finding  cash  to  meet  maturing 
bonds. 

*  New  York  Times,  May  4,  1913,  viii,  14,  i. 


PART  IV 

CONTROL  OF  REVENUES  AND  EXPENDI- 

TURES  UNDER  THE  NEW  SYSTEM  OF 

ACCOUNTING 


CHAPTER  IX 

Control  of  Revenue  Accruals  under  the  New 
System  of  Accounting 

A.    COST  of  installing  THE  NEW   SYSTEM 

Before  proceeding  to  a  detailed  discussion  of  the  ac- 
counting control  over  revenues  and  expenditures,  it  would 
be  advisable  to  consider  the  cost  of  installing  the  new 
accounting  system,  so  that  the  two  sides  of  the  problem 
— the  cost  of  installation  and  the  benefits  derived  there- 
from— might  be  compared.  Unfortunately  the  depart- 
ment of  finance  has  never  set  up  accounts  in  its  books, 
showing  the  various  elements  of  cost  entailed  in  the  in- 
stallation of  its  accounting  methods,  so  that  the  data  for 
such  a  comparison  are  lacking.  The  reasons  why  the 
cost  of  installation  cannot  be  determined  are  as  follows : 

1.  A  large  portion  of  the  expenditure  incurred  in  reor- 
ganizing the  department  of  finance  was  borne  by  the 
Bureau  of  Municipal  Research,  which  is  a  non-partisan 
private  institution.  In  six  years  from  1906  to  191 1,  the 
Bureau  spent  $100,000  on  the  work  directly  for  and  in 
the  comptroller's  office. ' 

2.  Although  some  expert  accountants  were  employed 
by  the  department  of  finance,  especially  for  this  task, 
many  experienced  officials  under  the  comptroller,  while 
assigned  to  their  regular  duties,  were  asked  to  cooperate 
from  time  to   time  with    the  men  from  the   Bureau   of 

'  Six  Years  of  Municipal  Research  for  New  York  City,  issued  by  the 
Bureau  of  Municipal  Research,  1911,  p.  17. 

411]  227 


228  FINANCES  OF  THE  CITY  OF  NEW  YORK  [412 

Municipal  Research  and  the  expert  accountants  in  the 
devising  of  the  new  forms  and  the  improvement  of  the 
antiquated  methods.  It  would  be  impossible  to  allocate 
their  salaries  according  to  the  respective  amounts  of 
time  they  spent  on  their  regular  duties  and  on  their  con- 
tribution of  the  extra  service.  Furthermore,  the  con- 
tinuous improvements  made  from  year  to  year  and  in 
some  cases  from  month  to  month,  add  immensely  to  the 
difficulty  of  keeping  an  accurate  cost  account. 

3.  What  is  true  of  the  department  of  finance  is  also 
true  of  the  outside  departments,  where  the  new  system 
has  been,  either  wholly  or  partly,  installed.  For  instance, 
the  water  department  was  completely  reorganized  only 
after  the  Bureau  of  Municipal  Research  had  made  a  very 
thorough  and  expensive  investigation  into  the  chaotic 
condition  of  the  department's  records.  The  department's 
employees  had  also  been  detailed  to  do  extra  service  in 
connection  with  the  inauguration  of  the  new  system. 

For  the  above-mentioned  reasons,  I  deem  it  wise  not 
to  put  down  here  a  few  known  items  of  expense  directly 
incurred  for  this  purpose,  because  such  items,  small  in 
amount  as  compared  with  the  total  cost  of  installation, 
do  not  reflect  the  magnitude  of  the  price  paid  for  the 
new  system.  There  is,  however,  a  consensus  of  opinion 
among  the  experienced  city  officials  whom  I  have  con- 
sulted that  the  amount  paid  was  inconsiderable  as  com- 
pared with  the  economies,  both  direct  and  indirect,  trace- 
able to  the  reconstruction  of  the  system. 

B.  INADEQUACY  OF  ACCOUNTING  CONTROL  OVER  REVENUE 

ACCRUALS 

Prior  to  1900  the  great  majority  of  government  ac- 
countants and  officials  in  the  United  States  made  no  dis- 
tinction between  the  revenues  accrued  and  the  revenues 


413]  CONTROL  OF  REVENUE  ACCRUALS  229 

received.  They  practically  paid  no  heed  to  the  revenues 
recorded  or  billed  as  distinguished  from  revenues  re- 
ceived, save  in  the  case  of  the  general  property  tax  and 
special  assessments/  As  soon  as  taxes  are  levied  they 
should  be  treated  as  an  asset  of  the  taxing  authority  be- 
cause although  they  have  not  yet  been  received,  they 
have  nevertheless  accrued.  Yet  no  government  account- 
ant has  acted  on  this  principle. 

New  York  City  has  taken  a  forward  step  in  the  right 
direction  by  installing  in  the  office  of  the  auditor  of  re- 
ceipts of  the  department  of  finance,  and  in  the  outside 
departments,  several  accrual  registers  for  the  purpose  of 
establishing  an  accounting  control  over  the  revenue  ac- 
cruals. Accrual  reports  have  been  submitted  by  the 
auditor  of  receipts  since  December  31,  igio.'' 

C.    THE  CLASSES  OF  REVENUE   ACCRUALS 

The  following  classes  of  revenue  are  now  treated  as 
accruals  to  the  city: 

1.  Revenues  from  rents,  derived  from  leasehold  agree- 
ments, etc. 

2.  Revenues  from  licenses,  derived  from  the  formal 
grant  or  permission  of  the  city  to  persons  or  corpora- 
tions to  conduct  certain  classes  of  business,  etc. 

3.  Revenues  from  permits,  derived  from  the  formal 
grant  or  permission  by  persons  in  administrative  or  ex- 
ecutive authority  for  the  performance  of  special  acts,  the 
expiration  of  the  grants  following  the  performance  of  the 
acts. 

^Proceedings,  Seventh  Annual  Convention  of  the  National  Associa- 
tion of  Comptrollers  and  Accounting  Officers,  1912,  p  98.  See  a  paper 
read  before  the  convention  by  L.  G.  Powers,  on  Revenue  Accruals. 

'Report  of  the  Division  of  Expert  Accounting,  1911-1912,  vol,  i,, 
pp.  125-134,  in  Municipal  Reference  Library  in  Municipal  Building. 


230  FINANCES  OF  THE  CITY  OF  NEW  YORK  [414 

4.  Revenues  from  office  fees,  fines,  penalties,  etc.,  de- 
rived as  charges  for  clerical  and  other  official  services 
rendered,  such  as  recording,  certifying,  administering 
oaths,  etc.,  and  also  as  charges  imposed  by  courts  and 
other  officers  exercising  a  judicial  discretion. 

5.  Revenues  from  taxes,  assessments,  water  rates,  re- 
demptions, franchises  and  miscellaneous  receipts,  tolls, 
forfeitures,  interest,  advances,  etc' 

Accounting  control  is  now  established  over  all  these 
classes  of  revenue  accruals  which  are  treated  either  as 
accruals  creating  accounts  receivable  or  as  accruals  co- 
incident with  cash,  as  shown  below. 

D.    CONTROL  OF  REVENUE  ACCRUALS  CREATING  ACCOUNTS 

RECEIVABLE 

I,  Control  Established  through  the  Accrual  Registers. 
— The  three  principal  elements  of  accruals,  creating  ac- 
counts receivable,  are  taxes,  assessments  and  water  rentsg^ 
I  will  take  up  the  first  in  this  chapter,  omit  the  second 
from  discussion,  owing  to  the  lack  of  space,  and  reserve 
the  third  for  the  following  chapter. 

The  department  of  taxes  and  assessments  prepares  the 
tax  rolls  and  extends  the  tax  against  each  individual 
piece  of  property,  both  real  and  personal,  as  spread  upon 
the  rolls.  They  are  then  transmitted  to  the  department 
of  finance,  where  the  auditor  of  receipts  audits  the  amount 
of  taxes  levied  to  the  assessed  valuations.  This  is  done 
by  multiplying  the  assessed  valuations  of,  say,  each  sec- 

'  See  a  paper  read  by  Hon.  Herman  A.  Metz,  ex-comptroller  of  the 
City  of  New  York,  on  Budgetary  and  Accounting  Revision,  before  the 
association  of  American  government  accountants,  at  Washington,  D.  C, 
Nov.  24,  1908. 

*I  wish  to  acknowledge  my  indebtedness  to  Mr.  H.  H.  Rathyen, 
Auditor  of  Receipts,  for  much  of  the  information  on  which  this  chapter 
is  based. 


415]  CONTROL  OF  REVENUE  ACCRUALS  23 1 

tion  by  the  tax-rate  for  the  year,  for  which  the  taxes  are 
levied.  The  product  should  equal  the  amount  of  taxes 
levied  on  each  section.  The  rolls  are  then  entered  in 
the  accrual  registers,  kept  at  the  office  of  the  auditor  of 
receipts,  there  being  separate  accrual  registers  for  each 
borough  and,  also  for  the  different  classes  of  taxes  as 
follows:  I.  Real  estate — land  and  buildings;  2.  Special 
franchises;  3.  Real  estate — corporations;  and  4.  Personal 
taxes. 

Each  register  is  divided  by  sections  and  subdivided 
by  volumes  corresponding  to  the  tax  rolls  or  volumes. 
The  amount  of  the  original  tax  levy  of  each  section  or 
volume  is  shown  in  the  upper  right-hand  corner  of  the 
respective  pages.  The  register  contains  columns  for 
entering  the  amount  of  taxes  collected,  the  amount  of 
taxes  canceled,  the  amount  of  interest  charged  and  col- 
lected, etc.  The  cancellations  are  controlled  by  the  reg- 
istration of  the  orders  originating  in  the  office  of  the 
auditor  of  receipts  before  they  are  turned  over  to  the 
receiver  of  taxes  and  are  audited  to  the  account  current 
from  the  receiver  of  taxes.'  The  totals  of  the  registers 
are  used  as  a  basis  for  formulating  general  journal  entries 
to  be  posted  to  the  general  ledger,  as  we  shall  see 
later  on. 

II.  7he  Pre-billi7ig  of  Taxes. — When  the  tax  rolls  are 
delivered  by  the  department  of  taxes  and  assessments  to 
the  receiver  of  taxes,  to  whom  a  warrant  has  been  issued 
by  the  city  clerk,  directing  him  to  collect  the  taxes  levied, 
it  is  the  duty  of  the  auditor  of  receipts  to  detail  some  of 
his  men  to  cooperate  with  the  men  under  the  receiver  of 
taxes  in  the  preparation  of  tax  bills  in  triplicate,  the 
original  being  used  as  a  receipted  bill  for  taxes  paid,  the 

'  Manual  of  Accounting  and  Business  Procedure,  p.  297. 


232  FINANCES  OF  THE  CITY  OF  NEW  YORK  [416 

duplicate  or  counterfoil  as  a  basis  for  auditing,  and  the 
triplicate  as  an  advice  to  the  taxpayer  of  the  amount. 
The  taxes  are  pre-billed  by  means  of  a  billing  machine, 
such  as  the  Elliott-Eischer  and  Remington.  About 
600,000  bills  are  prepared  within  three  weeks.  The  three 
copies  of  each  bill  are  made  out  by  one  operation.  At 
the  same  time  that  the  bills  are  written,  a  schedule  of 
bills  is  written  on  the  same  machine.  Each  schedule 
contains  fifty  lines  for  fifty  items  and  is  so  placed  on  the 
machine  that  the  adding  devices  thereon  will  automat- 
ically throw  a  total  of  all  the  fifty  items.  This  total  is 
then  checked  to  the  total  of  the  fifty  items  on  each  folio 
of  the  tax  rolls  and  enables  the  comptroller  or  the  audi- 
tor of  receipts  to  audit  the  tax  bills  before  they  are  ready 
for  collection.  A  great  many  errors  are  discovered  by 
this  process  of  pre-billing.' 

III.  The  Advantages  of  Pre-billing. — The  idea  of  pre- 
billing  the  taxes  is  that  if  the  bills  are  ready  promptly, 
the  payments  will  be  made  promptly.  Not  only  are  the 
tax  bills  prepared  in  advance,  so  that  the  taxpayers  can 
have  them  when  they  call  for  them,  but  they  are  also  pre- 
pared, as  stated  above,  in  triplicate  forms,  so  that  when 
a  taxpayer  applies  for  a  bill,  the  triplicate  or  the  "advice," 
showing  all  the  details  necessary  for  information,  can  be 
given  to  him.  This  new  method  of  preparing  the  tax 
bills  enables  the  department  of  finance  to  establish  for 
the  first  time  in  the  financial  history  of  New  York  City,^ 
a  thorough  control  over  the  collection  of  the  city's  taxes. ^ 

IV.  Control  of  Cash  Payments  by  a  System  of  Internal 
Checks. — After  the  tax  bills  are  prepared  and  audited  by 
the  auditor  of  receipts,  they  are  filed  in  a  cabinet  at  the 

'  See  a  pamphlet,  How  New  York  City  Writes  its  Tax  Bills  and  Col- 
lection Sheets,  in  Municipal  Reference  Library,  in  Municipal  Building. 

^ National  Municipal  Review,  April,  1913,  pp.  223-224. 


417]  CONTROL  OF  REVENUE  ACCRUALS  233 

office  of  the  receiver  of  taxes,  according  to  the  tax  refer- 
ence— section,  block  and  lot.  About  200,000  requisitions 
are  made  upon  the  receiver  of  taxes  by  the  taxpayers  in 
a  few  weeks.  They  are  filed  as  soon  as  they  are  received 
and  the  memorandum  bills  or  the  triplicates  are  mailed 
to  them  as  advices  of  the  amounts  due.  The  advices 
come  back  when  payment  is  made.  Taxpayers  desiring 
to  pay  the  taxes  in  person  will  first  present  themselves 
at  the  first  window  in  the  office  of  the  receiver  of  taxes 
and  tell  the  clerk  the  tax  reference  of  the  property  on 
which  they  wish  to  pay  the  tax.  The  bill,  containing  the 
original  and  the  counterfoil  or  duplicate  (the  triplicate 
having  been  previously  torn  ofT  and  sent  away  as  advice), 
is  then  extracted  from  the  filing  cabinet.  The  amount 
on  the  bill  is  registered  by  an  adding  machine  on  a  roll 
of  paper  in  duplicate.  One  slip  is  torn  off,  pinned  to  the 
bill,  and  transferred  with  the  bill  to  the  cashier  at  the 
next  window.  The  taxpayer  then  moves  over  to  the  next 
window  and  makes  his  payment.  The  amount  of  money 
is  then  stamped  on  the  bill  by  a  perforating  stamp,  which 
perforates  both  the  original  and  the  counterfoil.  The 
original  is  detached  and  given  to  the  taxpayer  as  a  re- 
ceipted bill,  and  the  counterfoil  or  duplicate  is  sent  to  a 
registration  clerk,  who  keeps  a  cash  book  or  a  cash 
"  tickler,"  showing  the  name  of  the  payer,  the  descrip- 
tion of  the  property,  etc.  At  the  close  of  the  day  the 
total  amount  as  shown  on  the  roll  of  paper  on  the  add- 
ing machine  at  the  first  window  should  agree  with  the 
total  amount  of  cash  registered  in  the  cash  book.  Each 
of  these  two  total  amounts  should  agree  with  the  amount 
of  cash  in  the  hands  of  the  cashier,  if  all  bills  are  fully 
paid.  But  in  many  cases  taxpayers  have  not  got  enough 
money  to  make  full  payment.  The  clerk  in  the  first  win- 
dow has,  however,  entered  the  amount  of  the  bill  on  the 


234  FINANCES  OF  THE  CITY  OF  NEW  YORK  [^jg 

roll,  charging  the  cashier  with  the  amount.  If  the  cashier 
does  not  collect  the  full  amount  from  the  taxpayers,  the 
unpaid  or  uncollected  amount  must  be  represented  by 
the  unpaid  vouchers.  The  total  of  the  cash  and  the  un- 
paid vouchers  in  the  cashier's  hands  must  be  equal  to  the 
footing  on  the  adding  machine  at  the  first  window,  or 
the  difference  between  the  footing  on  the  adding  ma- 
chine and  the  total  amount  of  cash  on  the  cash  book 
should  be  the  amount  of  the  unpaid  vouchers  in  the 
cashier's  hands.'  Thus,  the  clerk  at  the  first  window, 
the  cashier  and  the  registration  clerk  who  keeps  the  cash 
book  are  each  a  check  on  every  other. 

The  registration  clerk,  when  entering  the  amount  paid 
on  the  cash  book,  distributes  the  amount  by  the  several 
classes  of  taxes,  viz.,  real  estate — land  and  buildings — real 
estate  of  corporations,  special  franchises,  personal  taxes, 
water  rates,  etc.^  The  water  rates  are  the  arrears  trans- 
mitted by  the  water  department  to  the  tax  office  for 
inclusion  in  the  tax  rolls  as  liens  against  property. 

V.  T?ie  Auditing  of  Collections. — The  counterfoils,  or 
duplicates,  after  being  used  by  the  registration  clerk, 
will  be  assorted  in  accordance  with  the  sequence  of  the 
tax  reference  and  listed  on  an  adding  machine,  those  for 
the  individual  tax  rolls  being  brought  together  and 
listed  on  separate  schedules  of  collections.  The  total 
thrown  on  each  schedule  is  the  total  of  the  items  collected 
for  each  tax  roll.  After  the  schedules  are  reconciled 
with  the  bills  representing  the  collections  for  the  day, 
the  duplicate  schedules  of  collections,  together  with  the 
counterfoils,  are  sent  to  the  auditor  of  receipts  for  audit. 

'  See  a  pamphlet,  Procedure  Pertaining  to  the  Collection  of  Taxes,  in 
the  Bureau  for  the  Collection  of  Taxes,  Department  of  Finance,  New 
York  City,  pp.  6-8. 

•"Ibid. 


419]  CONTROL  OF  REVENUE  ACCRUALS  235 

He  will  check  the  counterfoils  to  the  schedules  and 
verify  their  footin^^s.'  At  the  close  of  the  day,  the  cashier 
prepares  a  report,  setting  forth  the  amount  of  collections 
for  that  day,  distributed  by  classes  of  taxes  collected  and 
the  funds  to  which  they  are  to  be  charged.  The  report 
is  forwarded  to  the  chamberlain  or  treasurer.  After 
that,  it  goes  to  the  city's  banking  depository,  accompan- 
ied, of  course,  by  the  amount  of  cash  recorded  in  the 
report.  The  receiving  teller  of  the  bank  will  then  certify 
on  the  report  the  amount  of  cash  received.  The  report 
then  returns  to  the  chamberlain's  office,  where  the  figures 
necessary  for  his  own  accounts,  are  extracted  from  the 
report.  It  is  then  forwarded  to  the  comptroller's  office, 
where  the  auditor  of  receipts  will  audit  the  figures  shown 
thereon  to  those  entered  on  the  schedules  of  daily  collec- 
tions. If  they  are  in  accord,  he  will  cause  an  entry  to 
be  made  in  each  of  the  following  : 

1.  The  accrual  register,  in  liquidation  of  the  accruals. 

2.  The  cash  book  journal,  from  which  totals  will  be 
taken  at  the  close  of  each  month  to  be  posted  to  the 
general  ledger  through  the  general  journal. 

3.  The  control  sheet,  which  is  an  account  receivable 
ledger. 

I  shall  discuss  these  records  in  detail  in  the  following 
pages.  For  the  present,  it  is  important  to  remember 
that  by  auditing  the  cashier's  report  to  the  schedules  of 
collections,  the  comptroller  is  assured  that  the  money 
shown  to  have  been  collected  by  the  receiver  of  taxes  on 
the  schedules  of  collections,  is  exactly  the  amount  turned 
into  the  city  treasury,  the  unmistakable  evidence  of 
which  is  the  chamberlain's  receipt  voucher.^ 

'  Procedure  Pertaining  to  Collection  of  Taxes,  etc.,  op.  cit.,  p.  9. 
'See  an  address  on  Taxes  by  Mr.  James,  Auditor  of  the  Water  De- 
partment, delivered  at  New  York  University,  1913-14. 


236  FINANCES  OF  THE  CITY  OF  NEW  YORK  [420 

VI.  T^e  Control  Sheet  and  its  Purpose. — I  have  already 
discussed  the  registers  of  accruals  for  the  purpose  of 
establishing  an  accounting  control  over  the  accruals.  In 
addition  thereto,  a  separate  control  is  also  established 
over  the  transactions  in  the  bureau  of  collections  by  set- 
ting up  controlling  accounts  in  the  control  ledgers  or 
control  sheets.  The  total  of  each  tax  roll  or  volume, 
before  filed  in  the  cabinet  kept  in  the  office  of  the  re- 
ceiver of  taxes,  is  entered  as  a  debit  on  the  control  sheet, 
while  the  collections  as  shown  on  the  duplicate  schedule 
of  collections  pertaining  to  that  roll,  are  entered  thereon 
as  a  credit. 

The  duplicate  schedule  of  collections  having  been  sent 
to  the  auditor  of  receipts,  the  original  schedule  is  retained 
by  the  receiver  of  taxes  for  the  purpose  of  liquidating 
the  taxes  on  the  tax  roll  by  posting  the  amount  paid. 
The  clerk  who  does  the  posting,  must  sign  his  name. 
Then,  two  or  three  days  later,  the  verifiers  will  go  over 
the  work  again,  veryfying  the  postings  and  signing  their 
names. ' 

Since  the  control  sheet  carries  the  total  of  a  single  tax 
roll  kept  in  the  office  of  the  receiver  of  taxes,  and  since 
the  same  amout  of  daily  collections  is  posted  both  to  the 
tax  roll  and  the  control  sheet,  it  is  evident  that  the  bal- 
ance of  the  control  sheet  drawn  ofT  at  the  close  of  each 
month  should  agree  with  the  balance  reflected  by  the  tax 
roll,  which  is  controlled  by  the  control  sheet.  The  bal- 
ance of  the  tax  roll  is  determined  by  listing  the  amounts 
due  on  the  roll.  Any  discrepancy  between  the  tax  roll 
balance  and  the  controlling  balance  indicates  error  which 

'  Address  on  Accounting  and  Auditing  Conttol  over  Revenue  Ac- 
cruals— Creating  Accounts  Receivable,  by  Mr.  H.  H.  Rathyen,  Auditor 
of  Receipts,  Department  of  Finance,  delivered  at  the  Bureau  of  Mu- 
nicipal Research,  Feb.  19,  1913. 


42l]  COXTROL  OF  REVENUE  ACCRUALS  237 

should  be  immediately  located.  The  receiver  of  taxes 
should  be  asked  to  give  an  explanation  of  the  difference. 
Furthermore,  the  controlling  balance  should  also  repre- 
sent at  all  times  the  number  of  tax  bills  pertaining  to  that 
particular  roll,  which  remain  unpaid  in  the  filing  cabinet. 
Trial  balances  of  these  two  subsidiary  records  should  be 
taken  ofif  at  least  once  a  month  and  should  be  in  accord 
with  the  controlling  balance.'  Once  a  month,  an  inspec- 
tion of  the  unpaid  tax  bills  in  the  filing  cabinet  should  be 
made  in  order  to  ascertain  whether  or  not  there  is  a  bill 
on  hand  for  every  open  item  in  the  tax  roll. 

VII.  The  General  Journal  Entries. — The  control  estab- 
lished over  the  revenue  accruals  creating  accounts  receiv- 
able can  be  more  clearly  understood,  if  the  financial 
transactions  we  have  discussed  thus  far,  are  expressed  by 
the  general  journal  entries.  After  the  amounts  reflected 
by  the  tax  rolls  are  entered  in  registers  of  accruals,  which 
I  have  discussed  above,  they  form  the  basis  for  formu- 
lating a  general  journal  entry,  reading  (the  figures  being 
fictitious)  : 

Accounts  receivable,  tax  levy,  blank,  year $200,000,000 

To  revenues,  general  government $190,000,000 

To  reserve  for  loss,  taxes  uncollectable.  10,000,000 

This  entry,  which  establishes  these  accounts  in  the  gen- 
eral ledger  to  be  reflected  in  the  general  account  balance 
sheet,  has  to  do  with  the  element  of  the  operation  and 
maintenance  account  which  records  the  purposes  for 
which  the  expenditures  are  to  be  made.  A  collateral 
entry  should  be  made  for  the  fund  group  of  accounts. 
But  for  lack  of  space,  this  and  other  collateral  entries  for 
the  fund  group  will  be  disregarded. 

^Handbook  of  Municipal  Accounting,  op.  cit.,  p.  102. 


238  FINANCES  OF  THE  CITY  OF  NEW  YORK  [422 

The  experience  of  New  York  City  shows  that  a  certain 
percentage  of  the  annual  tax  levy  proves  to  be  uncollect- 
able.  This  is  a  sheer  loss  which  is  traceable  to  cancella- 
tions, rebates,  and  simple  inability  to  collect  the  tax.  We 
have  assumed  that  for  the  given  year,  New  York  City 
will  provide  a  total  budgetary  appropriation  of  $190,- 
000,000,  of  which  about  $10,000,000  is  not  collectable. 
Therefore  the  city  will  have  to  meet  a  deficit  at  the  end 
of  next  year  by  resorting  to  loans,  because  the  funds 
necessary  for  the  operation  and  maintenance  of  the  gov- 
ernment are  $10,000,000  short.  There  are  only  tw^o  ways 
to  supply  the  amount  of  shortage,  viz.,  the  issue  of  bonds 
and  the  increase  of  the  tax  levy.  The  first  is  objection- 
able, not  only  because  the  city  has  to  bear  an  unnecessary 
burden  of  interest  charges,  but  also  because  the  city  may 
not  be  able  to  retire  the  bonds  in  the  following  year,  with 
the  result  that  the  burden  is  shifted  to  posterity.  There- 
fore a  sound  system  of  municipal  financing  requires  that 
the  probable  or  estimated  loss  due  to  uncollectability  of 
certain  amount  of  taxes,  cancellations  and  rebates  should 
be  added  to  the  total  annual  tax  levy  of  $190,000,000 
called  for  by  the  budget.  The  method  of  setting  up  a 
reserve  for  the  uncollectable  taxes  provides  currently  for 
the  inadequacy  of  funds.  Subsequently,  as  taxes  are 
found  to  be  uncollectable,  or  as  rebates  and  cancellations 
are  made,  the  reserve  is  no  longer  necessary.  It  should, 
therefore,  be  wiped  out  by  debiting  it  with  $10,000,000 
and  crediting  accounts  receivable  with  the  same.  The 
''accounts  receivable"  account,  after  its  $10,000,000 
credit  item  is  subtracted  from  its  $200,000,000  debit 
item,  will  show  a  balance  of  $190,000,000,  which  amount 
reflects  the  true  amount  collectable  through  the  year. 

At  the  close  of  each  month,  the  register  of  collections 
or  the  credit  cash  book,  in  which  the  daily  collection  re- 


423]  CONTROL  OF  REVENUE  ACCRUALS  239 

ports  from  the  cashier  have  been  entered,  is  footed,  the 
total  being  used  to  form  the  basis  of  a  general  journal 
entry,  reading  (figures  being  fictitious j: 

Cash,  City  Chamberlain , $30,000,000 

To  accounts  receivable,  tax  levy,  blank  year.  $30,000,000 

This  entry,  which  charges  the  chamberlain's  cash  ac- 
count, would  increase  the  bank  balance,  the  unapplied 
(net  cash)  balance,  which  is  the  cash  over  all  the  im- 
mediate demands  for  cash,  as  well  as  the  available  balance 
which  can  be  utilized  for  further  needs  of  cash  when  the 
liabilities  become  due/ 

VIII,  Efficiency  in  tfie  Collection  of  Arrears. — The 
amount  of  uncollectable  taxes  has  recently  been  reduced 
to  the  lowest  possible  minimum,  through  a  change  made 
in  the  legal  methods  of  enforcing  payments.  Prior  to 
1908,  the  accumulation  of  arrearages  from  tax  levies  and 
water  rents  in  the  City  of  New  York  amounted  to  more 
than  $100,000,000.  This  enormous  amount  was  the  re- 
sult of  the  inadequate  machinery  provided  for  collection, 
although  the  carelessness  or  neglect  of  public  officers  was 
also  partly  responsible  for  it.  In  addition  to  this,  there 
are  approximately  $30,000,000^  of  arrearages  annually 
committed  to  the  bureau  for  the  collection  of  arrears  and 
assessments.  The  problem  of  enforcing  the  payment  of 
such  a  vast  sum  of  back  taxes  and  water  rents  is,  there- 
fore, of  paramount  importance.  Fortunately,  the  legis- 
lature has  made  a  radical  change  in  the  former  provisions 
of  law  for  the  sale  of  real  property   in   the  City  of  New 

'See  Memorandum  Re  General  Ledger,  issued  by  the  Comptroller, 
May  12,  1910,  pp.  24,  28,  29. 

*A  paper  read  before  the  Eighth  Annual  Convention  of  the  National 
Association  of  Comptrollers  and  Accounting  Officers,  by  Comptroller 
Prendergast  of  New  York  City,  on  Collection  of  Arrears  of  Taxes  and 
Assessments. 


240  FINANCES  OF  THE  CITY  OF  NEW  YORK  [424 

York  for  the  collection  of  taxes,  water  rents  and  assess- 
ments.' Under  the  former  system,  taxes  and  assessments 
had  to  be  in  arrears  three  years,  and  water  rents  four 
years,  before  becoming  subject  to  sale,  and  when  sold, 
only  arrearages  that  had  run  for  at  least  those  periods 
respectively  were  included  in  the  charges  for  which  the 
property  was  sold.  Under  the  present  system,  the  period 
which  must  run  before  the  lien  is  subject  to  sale  is  un- 
altered ;  but  there  is  this  important  change :  not  only  is 
the  lien  sold  for  such  arrears,  but  there  are  also  included 
all  subsequent  liens  up  to  the  date  named  in  the  adver- 
tisement of  the  sale.  For  example,  if  the  taxes  for  191 1, 
1912  and  1913  remained  unpaid  on  the  last  day  of  De- 
cember, 1914,  the  taxes  for  191 1  have  surely  fallen  in 
arrears,  and  are  therefore  subject  to  sale.  But  the  pro- 
ceeds of  the  sale  will  be  used  not  only  to  liquidate  the 
obligations  of  191 1,  but  also  those  of  1912  and  1913. 
The  instrument  evidencing  the  sale  and  executed  by  the 
city  to  the  purchaser  is  called  a  "transfer  of  tax  lien." 
The  lien  is  offered  to  any  person  who  is  willing  to  bid 
the  lowest  rate  of  interest  on  the  purchase  of  it,  not  ex- 
ceeding 12  per  cent.  The  city  receives  the  principal  and 
interest  to  date  of  sale,  but  guarantees  the  lien  for  prin- 
cipal and  interest  at  the  rate  bid.  This  instrument  of 
transfer  is  regarded  as  a  first  mortgage  on  the  property 
affected  and  in  case  of  default  in  payment  of  interest  for 
thirty  days  or  in  payment  of  subsequent  taxes  for  six 
months  after  the  delivery  of  the  lien,  the  transfer  may  be 
foreclosed.'' 

The  result  of  the  effort  to  advertise  continuous  sales 

'  Provisions  of  Chapter  490  of  the  Laws  of  1908. 

'^Statement  in  Relation  to  Laiv  Governing  Sales  by  the  City  of  New 
York  for  Arrears  of  Taxes,  Water  Rents  and  Assessments,  issued  by 
the  Comptroller,  pp.  1-2. 


425]  CONTROL  OF  REVENUE  ACCRUALS  241 

in  all  of  the  five  boroughs  during  the  period  between 
1908  and  191 2,  both  inclusive,  is  reflected  by  the  remark- 
able increase  in  the  collections  of  arrears.  For  instance, 
prior  to  1908,  under  the  old  provisions  of  law,  the  annual 
collections  averaged  approximately  $14,000,000.  Since 
the  same  year,  when  the  new  law  took  effect,  the  collec- 
tions have  increased  to  approximately  $27,000,000  in 
1909,  $36,767,000  in  1910,  $26,541,000  in  191 1,  and  $30,- 
921,000  in  1912.  This  new  method  of  enforcing  the 
payment  of  back  taxes  has  finally  overcome  all  the  diffi- 
culties encountered  in  the  collection  of  the  special  fran- 
chise tax.  The  special  franchise  law  has  been  contested 
by  the  public  service  corporations  from  1900  to  1908,  in 
order  to  find  a  pretext  for  non-payment  of  their  taxes. 
Realizing  the  city's  power  to  foreclose  their  franchises, 
they  anticipated  the  sale  arranged  for  in  May,  1910.  The 
gas  and  electric  light  companies  liquidated  their  arrears 
amounting  to  over  $7,000,000  and  the  railroads  liqui- 
dated theirs  to  the  extent  of  about  $30,000,000.' 

E.  CONTROL  OF  REVENUE  ACCRUALS,  COINCIDENT  WITH 

CASH 

I.  Difference  between  Accrzials  Creating  Accounts  Re- 
ceivable and  Accruals  Coiticideizt  with  Cash. — So  far  I 
have  discussed  only  the  control  of  revenue  accruals  which 
create  accounts  receivable,  collectible  at  the  convenience 
of  the  payer.  There  is  another  class  of  accruals  which 
do  not  create  accounts  receivable,  by  reason  of  the  fact 
that  the  revenue  accrues  to  the  city  coincidently  with 
cash.     For   instance,  licenses  and  permits  which  repre- 

'  Paper  on  Collection  of  Arrears  of  Taxes  and  Assessments,  op.  cit. 

'Address  by  H.  H.  Rathyen,  Auditor  of  Receipts,  New  York  City, 
on  Auditing  and  Accounting  Control  of  Revenue  Accruals,  Coincident 
with  Cash,  delivered  at  the  Bureau  of  Municipal  Research,  1913. 


242  FINANCES  OF  THE  CITY  OF  NEW  YORK  [426 

sent  this  class  of  revenue  accruals  are  sold  for  cash  at 
the  time  they  are  applied  for.  The  object  to  be  obtained 
through  the  issue  of  licenses,  permits  and  privileges  is  to 
regulate  certain  classes  of  commercial  activities  and  to 
prevent  fraud  in  the  conduct  thereof.  A  charge  is  made 
as  a  contribution  to  the  expense  incurred  in  the  super- 
vision of  these  business  interests. 

II.  Control  of  Fixed  Charges. — Licenses  are  so  im- 
portant a  source  of  revenue  that  they  are  now  brought 
under  what  we  may  call  ''  stationery  financial  control." 
Without  this  control  the  issuing  clerks  might  issue  any 
form  in  order  to  pocket  the  proceeds,  with  little  danger 
of  being  detected.  Under  the  present  system  no  issuing 
office  of  licenses  can  issue  any  form  except  those  pre- 
pared by  the  comptroller  and  delivered  to  it  upon  requi- 
sition. To  the  end  that  the  city  may  be  protected  against 
the  use  of  unauthorized  stationery,  all  forms  of  licenses, 
permits,  etc.,  are  now  engraved  on  specially  manufactured 
paper,  each  sheet  of  which  is  counted  and  inventoried  by 
the  manufacturer  to  the  printer  or  engraver.  The  manu- 
facturer is  required  to  send  a  sworn  statement  of  the 
quantity  of  paper  manufactured  and  inventoried  to  the 
office  of  the  commissioners  of  accounts  as  well  as  to  the 
comptroller.  Upon  receipt  of  the  paper,  the  printers  are 
also  required  to  deliver  to  the  comptroller  and  the  com- 
missioners of  accounts  a  sworn  statement  of  the  quantity 
of  paper  received  from  the  manufacturers  and  a  sworn 
statement  of  the  numbers  of  documents  of  each  kind  de- 
livered to  the  auditor  of  receipts,  department  of  finance, 
together  with  a  statement  of  the  number  of  sheets  and 
the  weight  of  paper  used  in  the  preparation  of  forms  de- 
livered and  the  number  of  sheets  and  the  weight  of  paper 
destroyed  or  consumed  in  the  process  of  printing  and 
engraving. 


427]  CONTROL  OF  REVENUE  ACCRUALS  243 

Upon  receipt  of  the  forms  of  stationery,  the  auditor 
of  receipts  will  charge  himself  with  the  quantities  and 
amounts  represented  by  the  stationery  received  by  him, 
and  upon  the  delivery  of  forms  to  the  issuing  clerk  of  a 
department,  credit  himself  with  the  quantities  and 
amounts  represented  by  the  stationery  issued.  A  stock 
account  is  therefore  established  over  each  class  of  sta- 
tionery received  and  issued,  which  account  is  audited  by 
the  commissioners  of  accounts.'  When  he  credits  him- 
self, he  at  once  charges  the  license  clerk  of  the  depart- 
ment sending  the  requisition  for  stationery  with  the  same 
numbers  and  amounts.  The  license  clerk  is  credited 
when  he  sends  in  a  monthly  report  and  renders  an  ac- 
count current  to  the  comptroller  or  his  representative, 
the  auditor  of  receipts,  with  respect  to  each  class  of 
license  issued  or  to  be  issued.     They  must  show: 

(i)  The  balance  of  unissued  licenses  in  his  hands  at 
the  beginning  of  the  month. 

(2)  The  number  of  licenses  received  by  him  during 
the  month  as  of  which  the  report  is  made. 

(3)  The  number  of  licenses  spoiled  and  destroyed 
during  the  month. 

(4)  The  number  of  licenses  issued  during  the  month. 

(5)  The  balance  of  unissued  licenses  on  hand  at  the 
end  of  the  month. 

(6)  The  total  amount  of  fees  to  be  charged  for  the 
licenses  during  the  month. ^ 

All  the  spoiled  documents  are  returned  with  the  coun- 
terfoils to  the  auditor  of  receipts  who  audits  the  latter 
to  the  former.     The  license  clerk  of  any  issuing  depart- 

■  General  Description  of  the  New  System  for  Issuing,  Recording  and 
Making Rettirn  on  Licenses ,  issued  by  the  Department  of  Finance,  1909, 
pp.  12-13. 

■^  Ibid. 


244  FINANCES  OF  THE  CITY  OF  NEW  YORK  [428 

ment  is  credited  with  the  number  of  licenses  that  he  has 
spoiled  and  the  number  of  licenses  that  he  has  issued  and 
for  which  he  has  received  money  on  the  city's  behalf. 
The  balance  of  the  stock  account,  after  these  credit 
entries  are  made,  should  be  in  agreement  with  the  balance 
of  the  unissued  licenses  in  his  possession  at  the  end  of 
the  month.  Under  this  method  of  establishing  a  station- 
ery financial  control,  the  license  clerks  of  the  city  cannot 
very  well  issue  any  other  licenses  than  those  which  the 
comptroller  furnishes  them.  This  method  has  increased 
the  city's  revenue  and  has  certainly  exerted  an  uplifting 
influence  upon  the  morale  of  the  city  employees. 

Heretofore  the  comptroller  w^as  utterly  in  the  dark  as 
to  whether  or  not  the  issuing  agency  was  issuing  re- 
newal licenses  for  originals.  The  issuing  clerk  might 
issue  a  renewal  to  a  friend  of  his,  although  his  friend 
never  had  an  original.  Realizing  the  inducement  to  dis- 
honesty on  the  part  of  the  issuing  clerks,  Mr.  H.  H. 
Rathyen,  the  auditor  of  receipts,  department  of  finance, 
has  made  a  successful  attempt  to  control  all  of  these  doc- 
uments, both  original  and  renewal,  by  writing  up  some 
50,000  cards  in  1912  from  the  documents  he  received 
from  the  engravers.  These  cards,  showing  whether  or 
not  they  are  originals,  are  divided  into  sets,  there  being 
one  set  for  every  day.  After  they  are  indexed  and  as- 
sorted by  bureaus,  they  are  filed  in  sixteen  or  seventeen 
drawers  in  a  cabinet.  Every  class  of  license  which  was 
issued  on  a  particular  day  of  191 2  was  checked  up  on  a 
corresponding  date  in  1913.  Upon  receipt  of  the  reports 
from  the  bureau  of  licenses,  the  items  of  the  reports  were 
audited  to  the  cards  to  see  whether  or  not  they  had  issued 
a  renewal  for  the  original  license.  If  there  are  cases 
where  businesses  are  conducted  with  licenses  which  have 


429]  CONTROL  OF  REVENUE  ACCRUALS  245 

already  expired,  but  have  not  been  renewed,  the  city  has 
now  a  means  of  finding  them  out." 

III.  Control  of  Non-Fixed  Charges. — There  is  in  use 
in  New  York  City  today  another  form  of  financial  sta- 
tionery for  non-fixed  charges.  When  the  amount  charged 
is  fixed  and  engraved  on  the  document,  no  question  can 
arise  as  to  the  amount  of  receipts  the  collecting  officer 
should  account  for,  because  he  is  charged  with  the  num- 
bers and  amounts  of  documents  he  has  received  from  the 
comptroller  and  credited  with  the  numbers  and  amounts 
of  those  spoiled  and  issued.  The  examples  of  this  class 
of  stationery  are  the  licenses  which  I  have  discussed 
above,  tickets  for  tolls,  market  privileges,  etc.  But 
where  the  amount  charged  is  dependent  upon  the  nature 
of  each  particular  application,  and  has  to  be  written  in 
each  document,  as  in  the  case  of  permits  and  other  forms 
of  privileges,  the  control  is  established  through  the  use 
of  a  graduated  coupon  printed  on  the  right-hand  side  of 
the  document.  The  amount  charged  is  "cut"  on  the 
graduated  coupon  by  means  of  an  angle-rule  cutter,  and 
when  it  is  cut.  the  original  is  detached  from  the  counter- 
foil. The  highest  amount  remaining  on  the  coupon  rep- 
resents the  amount  charged  and  received.-  The  applicant 
for  the  document  will  naturally  look  at  the  highest  amount 
and  pay  no  more  than  this.  Therefore  the  issuing  clerk 
cannot  make  a  profit  out  of  the  transaction,  because  what 
he  receives  from  the  applicant  is  exactly  what  the  "cut" 
stands  for. 

In  order  to  cut  the  original  from  the  counterfoil  by 
one  operation,  the  former  is  folded  over  the  latter  from 
right  to  left,  the  stub  of  the  latter  only  being  bound  in 

'  Auditing  and  Accounting  Control  of  Revenue  Accruals,  Coincident 
with  Cash,  by  Rathyen,  op.  cit. 

» Ibid. 


246  FINANCES  OF  THE  CITY  OF  NEW  YORK  [430 

the  book  at  the  left.  In  this  way,  when  the  document  is 
cut,  the  counterpart  of  the  cut  on  the  original  will  re- 
main on  the  counterfoil,  which  is  below  the  original. 
This  counterfoil  is  forwarded  with  the  report  to  the  de- 
partment of  finance  and  serves  as  an  unmistakable  evi- 
dence as  to  the  amount  of  cash  collected.  The  collect- 
ing clerk  cannot  falsify  the  indentation  on  the  counterfoil, 
because  if  he  makes  a  second  cut,  he  only  increases  the 
amount  which  he  should  account  for.  This  method  is 
adopted  not  only  by  the  city,  but  also  by  the  express 
companies  and  the  post-ofifice  department  in  the  issuance 
of  money  orders.' 

Under  the  old  scheme  in  New  York  City,  the  original 
and  the  counterfoil  were  loose,  as  they  were  not  on  one 
sheet  of  paper.  It  was  an  easy  matter  to  issue  the  orig- 
inal to  the  applicant  for  $500  and  then  write  $400  on  the 
counterfoil,  which,  when  transmitted  to  the  department 
of  finance,  would  serve  as  a  basis  on  which  to  audit  the 
amount  of  money  collected.  A  dishonest  official  might 
therefore  pocket  the  $100,  for  which  he  would  not  be  re- 
quired to  account. 

IV.  Control  of  Receipts. — Most  of  the  one  hundred 
and  sixty  collecting  agents  in  the  City  of  New  York  re- 
port every  day.  A  great  many  of  them,  like  the  court 
clerks,  daily  collect  a  large  amount  of  money,  which  is 
deposited  in  the  bank  to  their  own  credit.  At  the  end 
of  the  month,  they  turn  in  their  money  to  the  chamber- 
lain by  transferring  the  bank  credit  to  him.  Prior  to 
191 1,  the  comptroller  had  no  knowledge  whatever  of  the 
total  amount  of  collections  deposited  with  the  different 
banks,  until  he  was  notified  of  the  receipt  of  money  by 
the  chamberlain  in  the  following  month.     As  these  col- 

'  Handbook  of  Municipal  Accounting,  pp.  95-6,    See  also  Short  Talks, 
No  7,  Bureau  of  Municipal  Research. 


43 1  ]  CONTROL  OF  REVENUE  ACCRUALS  247 

lections  are  revenue  accruals  coincident  with  cash,  they 
are  a  valuable  asset  to  the  city.  But  the  comptroller  had 
not  the  slightest  idea  about  these  assets.'  This  defect  in 
municipal  accounting  was  remedied  by  requiring  the  col- 
lecting officials  to  transmit  a  daily  report  to  the  comp- 
troller, setting  forth  the  amount  of  collections  by  classes, 
the  report  being  merely  a  copy  of  the  total  of  their  cash 
books.  The  auditor  of  receipts  keeps  in  his  office  an 
index  on  the  stubs  of  the  departments  assuming  the 
duties  of  collecting  agents.  When  the  reports  come  in 
every  day,  they  are  checked  up  with  the  index  to  see  if 
all  of  the  departments  have  reported.  If  some  have  not, 
they  are  requested  to  do  so  by  telephone. 

Upon  receipt  of  these  reports,  the  accruals  clerk  in  the 
office  of  the  auditor  of  receipts  makes  all  the  necessary 
entries  in  the  revenue  journal  which  is  a  register  of 
accruals.  This  journal  is  used  as  a  basis  for  the  making 
of  reports  to  the  general  ledger  clerk,  to  be  posted  to 
the  general  ledger  through  the  general  journal  entry, 
reading: 

"  Revenues  receivable,  other  than  taxes, 

To  revenues,  classified,  for  permits,  licenses, 
tickets  and  receipts  for  payments  which 
have    to    do    with    revenues    coincident 
with  cash  collections." 
It  should   be  noted   that  mere  illustrative  entries  are 
given  here,  and  that  in  actual  practice,  the  entries  will 
be  classified  in  detail.      When  the  daily  report  of  collec- 
tions which  is  prepared  by  the  cashier  of  the  collecting 
department  to  furnish  information  to  the  chamberlain,  is 
taken  to  the  bank  designated  by  the  banking  commission 

'  See  /Vew  York  City' s  Department  of  Finance,  submitted  by  Bureau 
of  Municipal  Research,  pp.  40-42. 


248  FINANCES  OF  THE  CITY  OF  NEW  YORK  [432 

as  the  city's  depository,  it  is  accompanied  by  the  amount 
of  cash  collected.  The  receiving  teller  of  the  bank 
will  certify  in  the  space  provided  in  the  report  that  the 
sum  deposited  for  the  day  is  in  agreement  with  that 
reflected  by  the  report,  which  is  then  forwarded  to  the 
chamberlain  for  his  information.  The  latter  will  abstract 
the  figures  necessary  for  his  own  entries  and  sign  his 
name  in  the  space  provided  in  the  report  which  has  now 
become  his  receipt  voucher.  He  will  issue  a  receipt  to 
the  cashier  and  transmit  the  receipt  voucher  to  the  comp- 
troller or  his  representative,  the  auditor  of  receipts,  as 
an  evidence  that  the  money  has  been  deposited  to  his 
credit.  The  auditor  of  receipts,  after  audit,  will  make 
daily  entries  in  the  cash-book  journal  charging  cash  and 
crediting  the  different  "revenue  receivable''  accounts. 
The  sum  of  the  various  columns  of  the  cash-book  journal 
will  be  reported  to  the  general  ledger  clerk  and  used  as 
a  basis  for  formulating  a  general  journal  entry,  reading  : 
"  Cash,  city  treasury, 

To  revenue  receivable,  other  than  taxes, 
current  year,  classified.  " 
From  the  above  it  is  clear  that  the  general  ledger  clerk 
will  charge  the  "  revenue  receivable  "  account  with  the 
amount  of  accruals  reported  to  him  by  the  auditor  of 
receipts  and  credit  it  with  the  amount  of  cash  collected 
and  turned  in  as  reported  to  him  by  the  latter.  The 
difference  between  the  debit  and  the  credit  of  this  ac- 
count indicates  the  amount  still  due  from  the  collecting 
officials.  The  inactivity  of  this  difference  or  balance  will 
direct  the  attention  of  the  comptroller  to  the  slow  return 
of  cash  collected  by  the  collecting  agents.     The  possi- 

'  Address  on  Control  of  Revenue,  Coincident  with  Cash,  by  Mr. 
James,  Auditor  of  the  Water  Department,  delivered  at  New  York  Uni- 
versity, 1913-14. 


433]  CONTROL  OF  REVENUE  ACCRUALS  249 

bility  of  making  slow  returns  is,  however,  avoided  by  a 
rule  that  no  collecting  official  in  New  York  City  can 
obtain  his  monthly  salary  unless  he  shows  the  auditor  of 
receipts  the  chamberlain's  receipt,  which  evidences  that 
he  has  made  a  deposit  of  the  money  he  has  collected  dur- 
ing the  previous  month.  The  paymaster  will  not  pay 
him  his  monthly  salary  except  upon  certification  by  the 
auditor  of  receipts  that  he  "  has  filed  the  return  of  moneys 
collected  by  him  "  during  the  previous  month/ 

The  total  amount  of  accruals  reported  as  collected  in 
1912,  of  which  the  comptroller  had  no  knowledge  what- 
ever prior  to  191 1,  amounted  to  over  $25,000,000.  The 
sum  that  the  collecting  officials  did  not  turn  in  on  Jan. 
I,  1913,  was  only  $145,000,  which  sum  was  still  left  in 
the  bank  to  the  credit  of  their  own  accounts.  This 
clearly  shows  that  the  city's  revenues  other  than  those 
from  tax  levy  are  now  brought  under  efficient  account- 
ing control.^ 

'  Rathyen,  Auditing  and  Accounting  Control  of  Revenue  Accruals, 
Coincident  with  Cash,  op.  cit. 

'Ibid. 


CHAPTER  X 

Control  of  Water  Revenue  Under  the  New  Sys- 
tem OF  Accounting 

A.  the  frontage  rate  and  the  meter  rate 


I 


Water  is  now  supplied  as  a  prime  necessary  to  the 
people  of  most  cities  at  a  stated  price.  Experience  shows 
that  cities  which  do  not  operate  waterworks  and  must 
therefore  depend  upon  private  water  companies  or  upon 
the  use  of  wells  and  springs  for  their  supply  of  water,  are 
subject  to  epidemics.  New  York  City  furnishes  pure  ^ 
water  to  its  people  through  the  operation  of  a  municipal 
water  plant,  acquired  through  the  issuance  of  long-term 
bonds  or  corporate  stock,  and  charges  adequate  prices 
for  the  use  of  such  water.     Leaving  out  of  consideration  I 

for  the  present  the  charges  for  water  used  for  miscellan- 
eous purposes,  two  rates  are  now  charged  for  city  water : 
the  frontage  rate  and  the  meter  rate.  The  frontage  rate 
is  an  annual  charge,  based  upon  the  front  width  of  a 
building,  the  number  of  stories,  and  the  number  of  fix- 
tures contained  therein.  For  instance,  the  annual  front- 
age rate  for  a  one-story  building,  wholly  or  partly  un- 
metered,  with  a  front  width  of  not  more  than  sixteen 
feet,  is  $4.00.  If  the  front  width  is  between  sixteen  and 
eighteen  feet,  a  rate  of  $5.00  is  charged.  The  rate  varies 
not  only  with  the  front  width,  but  also  with  the  number 
of  stories.  For  each  additional  story,  one  dollar  per 
annum  is  added.  The  regular  frontage  rate  is  based  on 
the  assumption  that  only  one  family  will  occupy  the  prem- 
250  [434 


435]  CONTROL  OF  WATER  REVENUE  25 1 

ises ;  for  each  additional  family,  or  apartment,  one  dollar 
per  annum  is  charged.  In  addition  to  the  regular  front- 
age rates  extra  and  miscellaneous  charges  are  made 
against  unmetered  premises.  Thus  for  baths  three  dol- 
lars per  annum  each  are  charged  ;  for  water  closets  and 
urinals  of  every  description,  two  dollars  each  per  annum  ; 
one  bath  and  one  water  closet  in  each  house  being  per- 
mitted, however,  without  additional  charge.' 

The  meter-rate  charge  is  based  on  the  actual  consump- 
tion as  shown  by  the  meter  measurement.  Upon  the 
authority  of  an  ordinance,^  the  commissioner  of  water 
supply,  gas  and  electricity  may,  at  his  discretion,  place 
water  meters  "for  all  places,  workshops,  hotels,  manu- 
factories, office  buildings,  public  edifices,  v/harves,  ferry 
houses,  and  in  all  places  where  water  is  furnished  for 
business  consumption,  except  private  buildings ;  the 
charge  for  water  measured  by  meter  to  be  ten  cents  per 
100  cubic  feet."  All  other  charges  are  reserved  for 
special  contracts  to  be  approved  by  the  commissioner  of 
water  supply,  gas  and  electricity.  Inspection  of  the 
premises  where  meters  are  installed  are  made  by  the  in- 
spectors of  the  bureau  of  water  register,  department  of 
water  supply,  to  secure  the  meter  readings  for  the  pur- 
pose of  establishing  the  proper  charges  upon  the  meter- 
rate  ledgers.  Under  the  rules  and  regulations  of  the 
department,  the  inspectors  must  be  given  access  to  all 
parts  of  a  building,  boat  or  place  where  the  water  supply 
is  measured  by  meter,  and  must  be  allowed  to  shut  ofT 
the  supply  for  the  purpose  of  inspection. ^ 

^See  the  Frontage  Rate  Bill. 

''Adopted  March  15.  1900,  signed  by  the  Mayor  April  10,  1900. 

'See  the  Meter  Rate  Bill. 


252  FINANCES  OF  THE  CITY  OF  NEW  YORK  [436 

B.    THE  ACCOUNTING  SYSTEM    IN  THE  FRONTAGE  RATE 

DIVISION 

The  frontage  rate  trial  balances  as  taken  off  in  the 
early  days  of  reorganization  were  not  in  agreement  with 
the  balances  shown  by  the  control  ledgers.  This  was 
due  to  incorrect  postings  of  adjustments  in  the  ledgers, 
failure  to  post  all  the  collections,  or  the  posting  of  pay- 
ments to  wrong  ledgers,  etc.  All  this  made  it  difficult 
to  bring  the  ledger  accounts  under  proper  accounting 
control.'  Today,  the  entire  system  has  been  completely 
reconstructed.  It  is  seldom  necessary  to  check  a  ledger 
for  its  correct  balance.  The  water  department  now  uses 
the  analytical  method  of  taking  ledger  balances.  By  this 
method,  errors  are  at  once  disclosed,  if  they  exist,  and  it 
usually  takes  but  a  few  minutes  to  locate  them.  Further- 
more, after  the  annual  frontage  rates  are  entered  in  the 
ledgers,  they  are  checked  and  the  items  on  each  folio  are 
checked  after  they  are  totaled.  Then,  the  folio  totals 
are  scheduled,  the  total  for  each  ledger  being  posted  to 
the  debit  side  of  its  respective  account  in  the  Control 
Ledger.  The  daily  transactions  affecting  each  frontage 
rate  ledger  for  a  fiscal  year  are  posted  in  total  to  the 
credit  side  of  the  Control  Ledger,  balances  being  taken 
at  regular  intervals.  The  trial  balances  drawn  off  from 
the  frontage-rate  ledgers  are  reconciled  with  the  balances 
shown  by  the  Control  Ledgers.''  The  quarterly  frontage 
rate  revenue  is  based  on  the  known  revenue  for  the  year, 
as  established  on  January  ist,  allowances  being  made  at 

'See  a  monograph,  Collecting  Water  Revenue,  Methods  of  Bureau 
of  Water  Register,  Manhattan,  with  Suggestions  for  Reorganization, 
issued  by  the  New  York  Bureau  of  Municipal  Research,  May,  1909, 
P-  31- 

'Address  by  B.  J.  Looram,  Accountant  of  the  Water  Department, 
delivered  on  The  Cofitrol  Division  of  the  Bureau  of  Water  Register,  at 
the  Bureau  of  Municipal  Research,  1913. 


437]  CONTROL  OF  WATER  REVENUE  253 

the  end  of  each  quarter  for  additions  or  deductions  which 
may  have  become  necessary  as  a  result  of  completion  of 
new  buildings  or  demolition  of  old  ones.' 

The  frontage  rates  are  charged  in  rem,  i.  e.,  against 
the  property,  not  against  the  owner.  For  this  reason, 
the  frontage-rate  bills  cannot  be  mailed  to  the  consumers, 
whose  names  are  immaterial,  bills  being  called  for  at  the 
frontage-rate  division  by  the  consumers  when  they  desire 
to  make  payments.  The  meter-rate  bills  are  mailed  to 
the  consumers,  by  reason  of  the  fact  that  their  names  and 
addresses  are  reported  to  the  office  by  the  inspectors 
who  inspect  the  premises  at  frequent  intervals.  Under 
the  new  system,  the  frontage  rates  are  prebilled,  precisely 
in  the  same  way  as  in  the  case  of  the  tax  bills.  In  other 
words,  the  bills  are  prepared  at  the  close  of  the  previous 
water  year,  thus  making  it  necessary  to  establish  the 
charges  in  the  ledgers  before  they  become  due  and  pay- 
able. When  all  the  annual  charges  are  prebilled,  a  sched- 
ule is  prepared  which  lists  the  amounts  due  in  the  con- 
sumer's ledgers  in  the  frontage-rate  division.  This 
schedule  of  accounts  receivable  is  made  out  in  duplicate, 
the  original  being  forwarded  to  the  Control  Division  of 
the  same  bureau,  the  total  of  all  schedules  forming  the 
basis  of  a  journal  entry  in  the  General  Journal  reading  : 

Frontage-rate  accounts  receivable,  year 

To  revenue,  frontage  rates " 

By  this  entry,  the  control  division  of  the  bureau  of 
water  register  is  informed  at  the  beginning  of  each  year 
of  the  total  sum  of  annual  charges  for  that  year.  It  will 
be  seen  that  in  the  absence  of  any  adjustments,  the  amount 
of  cash  collected  by  the  cashier  during  the  year  on  the 

'  Inter-office  Memorandum  from  the  accountant  in  charge  of  the  rev- 
enue division  to  the  Auditor,  Bureau  of  Water  Register,  dated  March 
20,  1914. 


254  FINANCES  OF  THE  CITY  OF  NEW  YORK  [438 

frontage-rate  bills,  would  be  equal  to  the  total  of  the  ac- 
counts receivable,  annual  charges.  If  the  total  collection 
falls  short  of  this  total  of  accounts  receivable,  at  the  end 
of  the  period  in  which  the  bills  are  due  and  payable,  the 
amount  uncollected  is  then  considered  as  arrears  and  is 
turned  over  to  the  receiver  of  taxes  for  collection. 

In  addition  to  the  internal  control  exercised  by  the 
control  division  over  the  frontage-rate  division,  there  is 
an  external  control  exercised  by  the  department  of 
finance.  For  this  reason,  a  duplicate  copy  of  the  sched- 
ule of  accounts  receivable  is  forwarded  to  the  auditor  of 
receipts,  department  of  finance,  for  the  purpose  of  estab- 
lishing a  control  over  the  annual  charges,  as  entered  in 
detail  in  the  consumers'  ledgers  in  the  frontage-rate 
division.'  The  department  of  finance  holds  the  water 
register  responsible  for  the  collection  of  the  annual 
charges  as  entered  in  the  consumers'  ledgers  and  as 
stated  in  the  duplicate  schedule. 

C.    PRESENT  SYSTEM  OF  ACCOUNTING  FOR  THE  METER 

RATES 

Some  five  or  six  years  ago,  during  the  reorganization 
of  the  bureau  of  water  register,  Manhattan,  it  was  pro- 
posed to  bring  all  of  the  meter-rate  ledgers  under  con- 
trol. As  there  were  then  one  hundred  and  seventy-eight 
meter-rate  ledgers  in  use,  it  was  found  impracticable  to 
establish  a  control  over  all  of  them  at  once.  Conse- 
quently, an  attempt  was  made  to  control  them  one  after 
the  other  until  full  control  was  established  over  all  meter- 
rate  ledgers  as  of  January  i,  191 1.  Since  that  date  three 
or  four  meter-rate  ledgers  have  been  added.     There  are 

'  See  a  lecture  on,  Collecting  and  Controlling  Water  Revenue,  deliv- 
ered by  Mr.  L.  A.  James,  auditor  Department  of  Water  Supply,  Gas 
and  Electricity,  at  New  York  University,  1913. 


439]  CONTROL  OF  WATER  REVENUE  255 

now  two  hundred  and  sixteen  ledgers  carried  in  control,, 
including  the  thirty-four  frontage-rate  ledgers.  They 
contain  approximately  one  hundred  and  fifteen  thousand 
accounts  for  the  borough  of  Manhattan  alone.  In  every 
other  borough,  a  similar  control  is  established  over  the 
ledgers.' 

The  first  step  in  the  present  accounting  procedure  in 
the  control  of  water  revenue  is  careful  and  frequent  in- 
spection. All  water-meter  inspectors  are  uniformed  and 
the  adoption  of  an  adequate  system  for  the  reading  and 
inspection  of  meters  has  rendered  the  revenue-collecting 
function  of  the  department  more  efificient.  The  new 
system  of  inspection  allows  the  work  to  be  carefully 
checked  and  recorded,  while  inspectors  can  be  located  at 
any  time  while  on  duty.^  They  are  supervised  and  their 
work  is  carefully  verified  from  day  to  day,  and  periodic- 
ally tested  and  compared  to  see  if  the  services  they 
render  have  attained  the  maximum  degree  of  efficiency. 
Approximately,  half  a  million  dollars  will  be  added  to  the 
revenue  each  year,  as  a  result  of  the  re-examination  of 
the  city  which  is  under  way.  In  fact,  the  efficiency  of 
the  bureau  of  water  register  has  been  increased  25  per 
cent,  and  modern  business  methods  and  principles  have 
been  adopted  in  the  administration  of  its  affairs. ^ 

For  the  purpose  of  making  a  full  examination  of  a 
building,  an  inspector  would  visit  the  premises,  measure 
the  front  width,  count  the  number  of  stories,  the  number 

^  Lecture  on  The  Control  Division  of  the  Bureau  of  Water  Register, 
by  Mr.  L.  A.  James,  Auditor  of  the  Department  of  Water  Supply,  Gas 
and  Electricity,  at  New  York  University,  1913-1914. 

''■  Annual  Report  of  the  Water  Department,  igii,  p.  7. 

^  See  a  pamphlet.  Economy  and  Efficiency  in  the  Department  of  Water 
Supply,  Gas  and  Electricity,  issued  by  the  Water  Department,  1913, 
pp.  8-9. 


256  FINANCES  OF  THE  CITY  OF  NEW  YORK  [440 

of  fixtures,  the  number  of  families  occupying  the  same, 
and  see  if  there  is  any  leak  or  waste  of  water  through 
the  fixtures,  etc.  He  then  makes  a  report  which  goes 
first  to  the  frontage-rate  division  as  a  basis  for  adjusting 
the  frontage-rate  charges  on  the  consumers'  ledgers,  if 
the  report  shows  conditions  dilTerent  from  those  shown 
on  the  ledger.  Then  it  goes  to  the  permit  division, 
where  the  information  relating  to  leak  and  waste  of 
water,  etc.,  is  abstracted  in  order  that  necessary  steps 
may  be  taken  to  remedy  such  a  condition.  A  record  is 
kept  of  all  the  reports  so  that  the  cases  may  be  followed 
to  a  conclusion.  When  a  case  is  closed,  the  report  goes 
to  the  meter-rate  division,  to  be  compared  with  the  con- 
sumers' ledger  account,  the  report  being  subsequently 
filed  in  the  general  file.  In  the  case  of  a  new  building, 
the  inspector's  report  goes  first  to  the  permit  division  to 
see  if  the  services  and  meters,  if  any,  are  set  in  accord- 
ance with  the  requirements  of  the  department.  Then  it 
is  transmitted  to  the  frontage-rate  division  for  the  open- 
ing of  an  account  in  the  consumers'  ledger,  if  unmetered, 
then  to  the  meter  rate  division  for  the  opening  of  an 
account,  if  wholly  or  partly  metered.  After  this  the  re- 
port is  transmitted  to  the  control  division,'  where  a 
meter-reading  sheet,  a  form  on  which  the  meter  read- 
ings are  recorded,  is  prepared  by  entering  the  tax  refer- 
ence— section,  block  and  lot — the  location  of  the  meter 
in  the  building,  the  index  of  the  meter,  etc.  These  are 
sent  at  regular  intervals  to  the  inspection  division  to  be 
vised  by  the  supervising  inspector,  who  removes  the 
sheets  showing  abnormal  readings  for  further  investiga- 
tion. The  sheets  with  normal  readings  are  returned  to 
the   control   division   to   be  listed   on  the   "  Schedule   of 

'  See  an  address,  Control  of  Water  Revenue,  by  L.  A.  James,  Auditor 
of  Water  Department,  at  New  York  University,  1913-14. 


441  ]  CONTROL  OF  WATER  REVENUE  257 

Meter  Readings."  All  the  sheets  pertaining  to  a  ledger 
are  brought  together  and  listed  on  one  schedule.  There- 
fore each  schedule  is  for  one  ledger,  containing  approxi- 
mately 300  consumers'  accounts  in  the  sequence  of  tax 
reference.  The  schedules  are  then  sent  to  the  meter  rate 
division,  where  the  readings  are  posted  to  the  meter  rate 
ledgers,  and  the  consumption  in  cubic  feet  is  recorded. 
The  same  clerk  who  does  the  posting  then  prepares  a 
meter  rate  bill,  a  full  description  of  the  particulars  of  the 
bill,  such  as  the  tax  reference,  the  street  address,  the 
name  of  the  person  against  whom  the  charge  is  made, 
etc.,  being  previously  recorded  on  the  bill  by  means  of 
an  addressograph  machine.  The  thing  to  be  inserted  in 
the  bill  is  the  consumption  in  cubic  feet,  which  is  reduced 
to  dollars  and  cents.'  This  method  saves  the  cost  and 
inconvenience  of  writing  out  in  full  each  particular  bill 
when  it  is  rendered  to  the  consumer.  The  three  ac- 
counts, the  one  entered  in  the  consumers'  ledger,  the  one 
appearing  on  the  schedule,  and  the  one  inserted  in  the 
bill,  are  the  same.  They  can  therefore  be  compared  to 
show  the  mathematical  accuracy  of  all. 

The  consumption  of  water  during  two  consecutive 
intervals  of  water  inspection  is  ascertained  in  the  following 
way.  The  clerk  posting  each  reading  deducts  the  previous 
reading  from  the  present  reading,  in  order  to  find  the 
amount  of  water  consumed  for  the  period  intervening 
between  the  two  readings.  After  he  has  determined  the 
consumption,  he  extends  it  in  the  ledger  and  inserts  it 
in  the  bill.  He  then  enters  the  previous  reading  and  the 
consumption  in  their  respective  columns  on  the  meter 
reading  schedule,  the  date  of  the  previous  reading  being 
noted  in  the  "  remarks  column  ".     The  date  of  the  present 

'  L.  A.  James,  op.  cit. 


258  FINANCES  OF  THE  CITY  OF  NEW  YORK  [442 

reading  and  that  of  the  previous  reading  being  given,  it 
is  an  easy  matter  to  determine  the  period  of  consumption, 
which  is  necessary  in  allocating  the  revenue  to  the  year 
in  which  it  is  earned.  For  instance,  a  meter  may  be  read, 
say,  in  September  of  one  year  and  in  April  of  the  next 
year.  In  this  case,  an  equal  ratio  or  fifty  per  cent  of  the 
entire  charge  is  applicable  to  each  year.  This  distribution 
is  made  in  order  to  determine  as  nearly  as  possible  the 
actual  revenues  for  each  year. 

After  the  previous  reading  and  the  consumption  have 
been  entered  in  their  respective  columns  on  the  schedules, 
the  schedules  are  returned  to  the  control  division,  where 
the  total  of  each  column  is  checked  and  proved.  This  is 
done  in  the  following  way.  The  clerk  in  the  control  divi- 
sion, upon  receipt  of  the  schedules,  ascertains  that  the 
total  of  the  "present  reading"  column  equals  the  sum 
of  the  totals  of  the  other  two  columns,  viz.,  the  "  previous 
reading"  column  and  the  "  consumption"  column.  This 
reverses  the  action  of  the  meter  rate  ledger  clerk,  because 
he  finds  out  the  consumption  by  deducting  the  previous 
reading  from  the  present  reading.  In  this  way,  a  com- 
plete control  is  established  over  the  entries  made  daily  in 
the  ledgers  by  the  meter  rate  ledger  clerk,  for  the  simple 
reason  that  the  Control  Division  knows  that  the  consump- 
tion extended  by  him  in  the  ledger  is  correct.  If  it  is 
not  correct,  the  error  will  be  detected  at  once. 

After  the  totals  of  each  schedule  have  been  verified, 
they  are  then  summarized  on  the  "  Summary  of  Meter 
Revenue,"  which  provides  columns  for  the  section,  vol- 
ume, schedule  number,  etc.  This  summary  sheet  is  for 
all  schedules  pertaining  to  all  ledgers  for  a  day.  In  case 
there  is  more  than  one  schedule  for  a  single  ledger  in  a 
day,  the  addition  or  total  of  each  schedule  is  entered  in 
the  "  Schedule  Total  "  column,  and  the  addition  of  the 


443]  CONTROL  OF  WATER  REVENUE  259 

schedules  for  a  ledger  in  the  "Volume  Total"  column.  The 
volume  total  is  then  posted  to  the  debit  of  the  control 
ledger  for  the  ledger  affected.  Consequent!}^  the  figure  in 
the  control  ledger  controls  all  the  daily  transactions  affect- 
ing one  ledger.  I  have  already  touched  upon  the  allocation 
or  apportionment  of  the  revenue  to  the  year  in  which  it 
is  earned.  On  the  "Summary  of  Meter  Revenue,"  the 
revenue  is  credited  to  the  different  years.  All  the  col- 
umns are  then  totaled  and  the  totals  transferred  to  the 
"  Revenue  Journal  "  for  meter  accounts.  As  the  "  Sum- 
mary of  Meter  Revenue  "  is  for  all  schedules  pertaining 
to  all  ledgers  for  a  day,  the  "  Revenue  Journal  "  is  for  all 
summaries  of  meter  revenue  pertaining  to  all  schedules 
for  a  month.  All  the  columns  in  this  journal  are  totaled 
at  the  end  of  the  month,  and  the  totals  are  posted  to  the 
general  ledger  through  the  medium  of  a  general  journal. 
Consequently  the  figure  posted  to  the  general  ledger 
controls  all  the  transactions  affecting  all  the  meter  rate 
ledgers  for  a  month.  In  other  words,  it  is  the  control- 
ling figure  for  all  the  meter  readings  entered  in  the  meter 
rate  ledgers  during  the  month. 

D.    ADJUSTMENTS 

The  above  description  of  the  procedure  followed  in 
establishing  control  over  water  revenue  is  almost  com- 
plete, if  no  change  need  be  made  in  the  accounts.  But 
a  changeless  keeping  of  accounts  is  hardly  obtainable,  in 
view  of  the  many  rebates,  refunds,  cancelations  and  cor- 
rections that  must  be  made  from  time  to  time.  When 
a  consumer  of  the  city  water  has  paid  his  bill  by  check, 
he  is  credited  with  the  amount  in  the  departmental  books. 
But  his  check  may  be  dishonored  by  the  bank  and  returned 
unpaid.  In  such  a  case,  the  credit  given  to  him  for  the 
payment  must  be  canceled.     Again,  a  property  using  the 


26o  FINANCES  OF  THE  CITY  OF  NEW  YORK  [444 

city  water  may  be  transferred  from  a  frontage  to  a  meter 
rate  basis,  thereby  necessitating  the  billing  of  the  fron- 
tage charges  to  date  and  the  opening  of  a  meter-rate 
ledger  account.  If  the  frontage-rate  charge  has  already 
been  paid  for  the  portion  of  the  year,  a  correction  must 
be  made.  Further,  in  many  cases,  over  or  double  pay- 
ments are  made  and  it  is  necessary  to  refund  the  excess 
to  the  consumers. 

Control  may  be  maintained  over  the  physical  condition 
of  the  premises  by  a  rule  of  the  water  department  requir- 
ing a  report  from  the  plumber  on  any  changes  he  has 
made  in  the  plumbing.  By  checking  the  reports  of  the 
plumbers  against  the  records  of  the  water  department, 
the  necessity  for  making  additions  and  reductions  will 
become  apparent  at  once  and  a  change  in  the  charge 
will  be  made,  if  the  plumber's  reports  are  verified  by  the 
inspectors  of  the  water  department. 

From  the  above  it  is  clear  that  the  authorities  for  re- 
funds, cancellations,  reductions  and  corrections  may 
originate  in  any  division  of  the  Bureau  of  Water  Regis- 
ter. The  "Adjustment  Authority"  is  a  sheet  issued  by 
a  division,  carrying  the  authority  for  making  changes  in 
the  accounts  in  the  consumer's  ledger;  it  must  indicate 
the  classification  of  the  accounts  receivable  that  are 
affected  by  the  change,  e.  g.,  frontage  rate,  meter  rate, 
or  miscellaneous.  It  must  also  show  the  tax  reference 
of  the  property — section,  block  and  lot — so  that  the  ac- 
count or  accounts  afifected  may  be  easily  located.  A  full 
explanation  is  given  of  the  nature  of  the  adjustment. 
These  authorities  are  then  forwarded  to  the  control  divi- 
sion for  scheduling  on  the  "Schedule  of  Adjustments." 
They  are  arranged  according  to  section,  block  and  lot, 
bringing  together  all  the  items  that  go  into  one  ledger 
before  they  are  scheduled.     After  they  have  been  sched- 


445]  CONTROL  OF  WATER  REVENUE  26 1 

uled,  sub-totals  are  taken  at  the  end  of  each  group  of 
adjustment  items  relating  to  one  ledger.  In  other  words, 
several  groups  of  adjustment  items  affecting  several 
ledgers  may  be  footed  up,  and  the  footings  (footings  of 
the  debit  and  credit  columns)  are  the  controling  figures 
for  the  total  debit  and  credit  adjustments  made  in  the 
several  ledgers  during  the  day,  these  totals  being  posted 
to  the  respective  control  ledger.  In  this  way  the  sub- 
sidiary ledgers  and  the  control  ledger  are  reconciled. 

The  adjustment  authorities  concerning  all  subsidiary 
ledgers  for  a  day,  having  been  scheduled  in  the  manner 
indicated  above,  are  then  sent  to  the  adjustment  journal 
clerk  to  journalize.  He  posts  the  items  from  the  author- 
ities into  the  "  Adjustment  Journals  ",  as  debits  or  credits. 
At  the  end  of  each  day,  he  checks  the  total  debits  and 
the  total  credits  for  all  ledgers  and  makes  a  recapitulation 
of  these  daily  totals  by  days  in  order  to  obtain  a  monthly 
total.  This  monthly  total,  which  is  the  controling  figure 
for  all  adjustments  relating  to  all  ledgers,  is  posted  to 
the  General  Ledger  through  the  medium  of  the  General 
Journal.  In  this  way,  the  General  Ledger  is  brought 
into  reconciliation  with  the  Control  Ledgers  and  the 
subsidiarv  ledgers. 

E.     THE  CONTROL  OF   COLLECTIONS 

The  control  over  the  collections  of  water  revenue  is 
established  in  the  following  way.  When  a  consumer  pre- 
sents a  meter-rate  bill  or  applies  for  a  frontage-rate  bill, 
an  entry  is  made  by  the  entry  clerk  in  the  cashier's  divi- 
sion on  a  form  called  the  "  Schedule  of  Collections." 
The  bill  is  then  passed  to  the  cashier,  who,  upon  receipt 
of  the  amount  indicated  therein,  receipts  the  bill,  de- 
taches the  stub  or  duplicate  bill,  giving  the  consumer  the 
original  as  a  receipt.     At  the  end  of  the  day  the  total  of 


262  FINANCES  OF  THE  CITY  OF  NEW  YORK  [_|^_^6 

the  items  shown  on  the  stubs  or  dupHcate  bills  and  slip 
charges  for  permits  must  be  equal  to  the  total  of  the 
cash  collections  in  the  hands  of  the  cashier.  These  two 
totals  must  each  agree  with  the  total  as  reflected  in  the 
schedule  of  collections  prepared  by  the  entry  clerk.  Here 
is  another  illustration  of  the  usefulness  of  an  internal 
check.  After  this,  the  stubs,  duplicate  bills,  etc.,  are 
sent  to  the  control  division  from  the  cashier's  division. 
Here  they  are  grouped  according  to  the  tax  reference, 
those  relating  to  one  ledger  being  brought  together. 
The  amounts  are  then  scheduled  on  the  "  Schedule  of 
Collections "  used  in  the  control  division.  Separate 
schedules  are  provided  for  collections  for  the  different 
functions,  z.  e.,  frontage  rate,  meter  rate  and  miscellane- 
ous charges.  Upon  the  completion  of  the  schedules  for 
all  ledgers  in  a  day,  the  schedule  totals  are  summarized 
each  day  on  the  "  Daily  Summary  of  Collections,"  and 
the  total  amount  of  this  daily  summary  must  agree  with 
the  total  amount  oi  cash  as  shown  in  the  cashier's  cash 
book.  This  is  a  check  upon  the  work  of  the  cashier. 
The  daily  summaries  for  all  days  in  the  month  are  then 
recapitulated  on  the  "  Monthly  Recapitulation  of  Collec- 
tions." The  total  show^n  on  this  recapitulation  can  again 
be  checked  to  the  total  of  the  cash  book  in  the  cashier's 
division.' 

The  schedules  of  collections  of  the  frontage-rate  and 
meter-rate  charges  are  forwarded  to  the  respective  divi- 
sions for  the  purpose  of  posting  the  amounts  as  credits 

'  The  description  of  the  accounting  procedure  as  given  in  this  chapter 
has  been  certified  as  correct  and  true  to  fact  by  Mr.  Hawkins,  account- 
ant in  charge  of  the  revenue  division  of  the  Bureau  of  Water  Register. 
Mr.  Hawkins  is  cognizant  of  every  phase  of  the  new  system  of  account- 
ing installed  in  that  bureau. 


^.47]  CONTROL  OF  WATER  REVENUE  263 

to  the  consumers'  ledger.'  As  has  already  been  stated, 
the  consumers  are  charged  in  the  books  at  the  com- 
mencement of  the  water  year  for  the  frontage  rate  and  at 
regular  intervals  for  the  meter  rates,  after  the  readings 
are  taken  by  the  inspectors.  Now  when  they  have  paid 
their  bills,  they  should  be  credited  in  the  books  with  the 
amount  they  have  paid.  Hence  the  forwarding  of  the 
schedules  of  collections  to  the  frontage  rate  and  meter 
rate  divisions  for  the  posting  of  the  amounts  to  the 
credit  side  of  the  consumers'  ledger.  After  the  postings 
are  completed,  the  schedules  are  returned  to  the  control 
division,  where  the  volume  totals  are  entered  on  the  re- 
spective frontage-rate  and  meter-rate  control  ledgers 
(control  sheets).  Incidentally  a  duplicate  copy  of  the 
schedules  of  collections  is  prepared  and  forwarded  to  the 
auditor  of  receipts  in  the  department  of  finance. 

If  the  consumer  fails  to  pay  the  bills  during  the  cur- 
rent year,  the  water  department  certifies  on  March  ist 
of  the  year  to  the  receiver  of  taxes,  in  the  department  of 
finance,  the  amount  due  from  each  taxable  lot  using  the 
city  water.  The  receiver  of  taxes  will  then  add  it  to  the 
tax  bill  of  May  ist  following.  If  it  is  not  paid  within 
the  current  tax  year,  he  will  certify  the  amount  due  for 
water,  together  with  the  arrears  of  real-estate  taxes,  to 
the  collector  of  assessment  and  arrears,  to  whom  it  must 
thereafter  be  paid.^ 

F.    THE  CONTROL  LEDGERS 

The  accounting  control  as  described  above  is  nothing 

^Inter-office  Memorandum  to  the  Acting  Auditor  of  the  Bureau  from 
the  accountant  in  charge  of  the  water-revenue  division,  dated  March 
20,  1914. 

^The  Single  Tax  Review,  Special  Number,  Vol.  13,  No.  i,  January 
to  February,  1914,  pp.  65-66. 


264  FINANCES  OF  THE  CITY  OF  NEW  YORK  [448 

but  an  internal  check  between  the  control  division  and 
the  other  divisions  in  the  bureau  of  water  register.  As 
stated  above,  in  addition  to  this  internal  check,  there  is 
an  external  one,  established  by  the  department  of  finance 
over  the  work  of  the  water  bureau.  The  water  bureau 
reports  at  the  end  of  each  month  to  the  department  of 
finance,  the  conditions  of  each  frontage-rate  and  each 
meter-rate  ledger,  by  means  of  monthly  summaries  (fron- 
tage and  meter),  prepared  from  the  monthly  totals  of  the 
control-ledger  sheets  as  stated  below.  Separate  sheets 
are  provided  for  each  frontage-rate  and  each  meter- 
rate  ledger,  containing  thirty-one  lines  each.  Each  line 
on  the  sheet  is  for  the  daily  totals  of  debits  and  credits 
posted  to  each  subsidiary  ledger.  The  daily  totals  are 
taken  from  the  sub-totals  of  the  various  schedules,  such 
as  the  schedule  of  meter  readings,  schedule  of  collections 
and  the  schedule  of  adjustments.  At  the  end  of  each 
month,  the  daily  totals  are  summarized  at  the  bottom  of 
each  control  sheet  affecting  one  ledger  only.  This  sum- 
mary is  made  in  triplicate,  one  copy  being  sent  to  the 
auditor  of  the  water  department,  one  retained  in  the 
control  division,  and  one  sent  to  the  auditor  of  receipts 
in  the  department  of  finance  to  enable  the  comptroller  to 
exercise  an  accounting  control  over  the  total  amount  of 
water  revenue  each  month.  The  control  sheet  is  also 
used  to  check  and  prove  the  correctness  of  the  consumers' 
ledger  controlled  by  itself,  for  the  trial  balance  of  the 
ledger  as  taken  ofT  at  the  end  of  each  month  must  be  in 
agreement  with  the  balance  shown  by  the  respective  con- 
trol sheet  for  that  ledger.  If  it  is  not,  the  ledger  clerk  is 
notified  and  the  error  is  located.  It  takes  only  a  few 
minutes  to  locate  it. 

It  may  be  well  here  to  illustrate  the  monthly  summary 


449]  CONTROL  OF  WATER  REVENUE  265 

of  the   daily  totals '  entered   on   one  control  sheet,  the 
figures  in  our  illustration  being  entirely  fictitious  : 

Summary  of  Debits.  Summary  of  Credits. 

Balance — beginning  of  Allowances $6,700 

month $30,000     Cash  collected 38,000 

Rates  (charges)  and  penal-  Balance,  end  of  month.    .    .  39,300 

ties 50,000 

Miscellaneous  debits    .    .    .      4,000 


Total $84,000  Total $84,000 

G.    DOCUMENTS  TRANSMITTED  TO  THE  DEPARTMENT 

OF    FINANCE 

In  connection  with  the  external  control  of  water  reve- 
nue, exercised  by  the  department  of  finance,  the  bureau 
of  water  register  transmits  several  documents  to  the 
auditor  of  receipts  of  the  department  of  finance  for  the 
purpose  of  establishing  a  basis  for  audit.  These  docu- 
ments consist  of  the  schedule  of  accounts  receivable  from 
frontage  rates,  the  daily  recapitulation  of  the  meter-read- 
ing sheets  by  volume  totals,  the  schedule  of  adjustments 
and  the  schedule  of  collections  in  detail  and  the  monthly 
summary  of  control  sheets.  They  are  audited  as  to 
arithmetical  accuracy  in  the  department  of  finance,  and 
the  figures  are  entered  in  the  register  of  water  revenue 
receivable  and  also  on  the  control  sheets  kept  in  that  de- 
partment, which  act  as  a  check  upon  the  accuracy  of  the 
consumers'  ledgers  in  the  water  department.  The  me- 
dium of  reconciliation  is  the  monthly  summary  of  the 
w^ater-department  control  sheets  and  that  of  the  finance 
department  control  sheets.^ 

'  See  the  Control  Sheet,  either  for  frontage  rate  or  for  meter  rate. 

'  See  the  lecture.  Collecting  and  Controlling  Water  Revenue,  delivered 
at  New  York  University  by  Mr.  L.  A.  James,  Auditor  Department  of 
Water  Supply,  Gas  and  Electricity. 


.266  FINANCES  OF  THE  CITY  OF  NEW  YORK  [450 

In  addition  to  the  above-mentioned  documents  sub- 
mitted to  the  department  of  finance,  the  water  depart- 
ment submits  a  quarterly  report  of  revenues  accrued. 
The  figures  in  the  report  are  taken  from  the  General 
Control  Ledger,  maintained  in  the  audit  division  of  the 
bureau  of  water  register,  Manhattan.  This  General  Con- 
trol Ledger  controls  the  General  Ledgers  maintained  in 
the  bureaus  of  water  register  for  the  five  boroughs.  The 
general  bookkeeper  in  each  bureau  forwards  to  the 
auditor  of  receipts  in  Manhattan  every  month  a  copy  of 
the  general  journal  entries  which  he  has  made  during 
the  month.  On  the  basis  of  these  entries  the  accounts 
in  the  general  control  ledger  are  opened  and,  on  the 
basis  of  these  accounts,  the  quarterly  revenue  statements 
are  prepared.' 

H.    THE  RESULT  OF  THE  NEW  SYSTEM   OF  ACCOUNTING 

The  bureau  of  water  register  was  reorganized  as  a 
result  of  the  publicity  given  to  the  120  different  findings 
made  by  the  Bureau  of  Municipal  Research,  all  of  which 
are  embodied  in  the  latter's  publication.  Collecting  Wafer 
Reve7iue ;  Methods  Employed  by  the  Bureau  of  Water 
Register  in  Manhattan,  with  Suggestions  for  Reorgan- 
ization. The  cooperative  and  supervisory  relation  of  the 
Bureau  of  Municipal  Research  to  the  reorganization  work 
of  the  bureau  of  water  register  resulted  in  an  increase  in 
water  revenue  of  $4,500,000  for  the  first  two  years.  It 
is  estimated  that  the  increase  will  total  at  least  $2,000,000 
a  year  in  perpetuity.^  Meters  are  now  regularly  read 
and  the  readings  are  placed  on  the  books  and  billed  in- 

'  See  the  footnote  on  the  revenue  statement  for  the  quarter  ended 
March  31,  1914. 

^  See  a  pamphlet,  Six  Years  of  Mu7iicipal  Research  for  New  York 
City,  issued  by  the  Bureau  of  Municipal  Researcli,  1912,  p.  26. 


45 1  J  CONTROL  OF  WATER  REVENUE  267 

side  of  four  days.  The  accounts  in  arrears  are  followed 
up  at  close,  regular  intervals.  Accounting  control  has 
been  so  successfully  established  that  errors  can  be  de- 
tected and  corrected  within  a  short  time.  This  means 
that  452  ledgers,  containing  over  400,000  consumers'  ac- 
counts, are  checked  at  regular  intervals  with  respect  to 
charges,  adjustment  of  errors  and  collections.'  The 
clerical  methods  employed  by  the  water  bureau  were 
carefully  investigated.  The  clerical  work  was  equitably 
redistributed  with  a  view  to  obtaining  the  maximum  effi- 
ciency from  each  employee.  As  a  result  of  this  redistri- 
bution, ihe  clerks  in  the  meter-rate  division  can  now 
handle  twice  as  many  accounts  as  before  the  time  of  re- 
organization, in  spite  of  the  fact  that  the  meters  are  now 
m.ore  frequently  read.^ 

Further,  as  a  result  of  the  installation  of  the  new  ac- 
counting system,  the  water  revenue  for  191 1  increased 
to  $12,154,484.81.  The  aggregate  amount  of  the  out- 
standing water  bonds  that  were  issued  to  finance  the 
present  water  system  under  the  control  of  the  water  de- 
partment was,  in  191 1,  $96,933,517.76.  An  annual  four 
per  cent  interest  charge  on  this  indebtedness  would  be 
$3,877,340.71.  The  appropriations  of  this  department 
for  all  water  purposes  for  all  boroughs  was  for  191 1, 
$4,623,000.  The  two  items  of  expense  made  up  a  total 
expenditure  of  $8,500,340.71.  Subtracting  this  total 
from  the  total  income  of  $12,154,484.81,  the  city  gained 
a  profit  of  $3,654,144.10.3     It  must  be  noted,  however, 

'  Annual  Report  of  the  Department  of  Water  Supply,  Gas  and  Elec- 
tricity, 1910,  p.  7. 

-  Ayinals  of  American  Academy  of  Political  and  Social  Science,  IQ12, 
Vol.  14,  p.  83.  This  volume  contains  an  excellent  article  on  ''  Economy 
and  Efficiency  in  the  Department  of  Water  Supply,  Gas  and  Electricity, 
New  York  City,"  by  J.  Leggett  Pultz,  pp.  78-85. 

^Annual  Report  of  the  Department,  1910,  p.  7. 


268  FINANCES  OF  THE  CITY  OF  NEW  YORK  [452 

that  the  amortization  charges  of  approximately  $1,- 
500,000'  on  the  outstanding  water  bonds  are  not  in- 
cluded in  this  computation. 

'  See  a  typewritten  report  on  Present  and  Prospective  Earnings  of  the 
Water  Supply  System  of  the  City  of  New  York ,  in  the  Municipal  Branch 
Library,  Municipal  Building,  1914. 


CHAPTER  XI 

Control  of  expenditures  for  Supplies,  Materials 
AND  Equipment  under  the  New  System  of 

zA-CCOUNTING 

This  class  of  expenditure  originates  in  a  bureau  or 
division  which  requires  some  materials  and  supplies.  It 
tabulates  exactly  what  it  needs,  and  what  it  thinks  the 
cost  will  be,  on  a  requisition  blank  which  is  forwarded 
to  the  head  of  the  division,  then  to  the  head  of  the  bu- 
reau, and  finally  to  the  deputy  or  acting  commissioner 
of  the  department  in  charge  of  the  purchase  of  supplies. 
After  it  has  been  approved  by  him  it  goes  to  the  general 
bookkeeper  or  the  auditor  of  the  department,  who  must 
certify  that  there  are  sufficient  funds  available  and  indi- 
cate the  account  against  which  the  purchase  is  charge- 
able. The  important  point  to  bear  in  mind  is  that  no 
purchase  can  be  authorized  unless  the  fund  out  of  which 
it  is  to  be  paid  for  is  sufficient.'  Then  it  goes  to  the 
bureau  of  supplies,  which  has  been  notified  as  to  the 
money  being  there  and  the  necessity  for  making  the 
purchases  as  requisitioned. 

A.   contract  AND  OPEN-MARKET  ORDERS 

The  next  step  the  department  takes  is  to  create  a  con- 
tractual relation  between  the  city  and  the  vendors  through 

^  See  an  address  by  Mr.  Clowes,  a  senior  accountant  of  the  Bureau  of 
Municipal  Research,  on  Accounting  Tests,  delivered  at  the  Bureau, 
April  9,  1913. 

453]  269 


2^0  FINANCES  OF  THE  CITY  OF  NEW  YORK  [4^^ 

a  purchasing  agent.     Contracts  having  been  entered  into, 
the  purchasing  agent  then  issues  orders  to  the  vendor. 

Whenever  orders  are  issued  for  services  to  be  rendered 
or  for  suppHes  to  be  furnished,  involving  an  expenditure 
of  one  thousand  dollars  or  more,  they  must  be  issued  as 
contract  orders  after  public  advertisement.  Open-market 
orders  are  issued  for  the  same  purposes  involving  an  ex- 
penditure of  less  than  one  thousand  dollars.'  The  con- 
tracts made  through  public  letting  consist  of  those  for 
the  construction  of  subways,  aqueducts,  street  paving, 
erection  of  buildings,  laying  of  sidewalks,  alterations  to 
buildings,  other  public  improvements,  and  finally  the  fur- 
nishing of  supplies,  materials  and  equipment.  Another 
difference  between  contract  orders  and  open-market 
orders  is  that  the  former  are  issued  on  the  basis  of  a 
formal  contract,  the  latter  on  that  of  an  informal  contract. 

Every  department,  bureau  and  of^ce  is  required  to 
transmit  one  copy  of  the  orders  issued  to  the  inspection 
division,  department  of  finance,  as  a  basis  for  inspection 
when  the  goods  are  delivered.  It  is  required  to  accom- 
pany the  same  with  a  schedule  of  such  orders  on  a 
special  form,  containing  the  date  and  number  of  the 
order,  the  estimated  amount  thereof  and  the  distribution 
by  funds  against  which  the  amount  is  to  be  charged. 
The  same  form  is  used  to  inform  the  department  of 
finance  of  the  orders  that  have  been  canceled.  These 
canceled  orders  are  entered  in  red  ink  in  order  to  dis- 
tinguish them  from  the  rest.  This  step  is  necessary  to 
enable  the  comptroller  to  establish  currently  the  depart- 
mental encumbrances  against  the  funds,  for  when  open- 
market  orders  or  contract  orders    have  been  issued  by 

'N.  Y.  Charter,  Section  4ig. 

'Circular  No.  17,  relative  to  Open-Market  Orders,  Invoices,  Voucher 
Schedules,  and  Monthly  Statements. 


455]  CONTROL  OF  EXPENDITURE  2/1 

a  department,  chargeable  against  certain  appropriation 
or  corporate  stock  funds,  they  become  an  encumbrance 
on  them. 

The  city  has  now  incurred  a  contingent  liabiHty  aris- 
ing from  the  issue  of  open-market  orders  and  the  letting 
of  contracts.  This  contingent  liability  will  become  an 
actual  liability  when  the  contractors  and  the  vendors 
have  fulfilled  the  requirements  of  the  contracts  and  open- 
market  orders,  which  constitute  a  real  encumbrance  on 
the  appropriation  or  other  fund  account.  In  order  that 
the  real  situation  of  each  fund  account  may  be  clearly 
and  properly  shown,  the  total  amount  of  the  contingent 
liability  from  contracts  let  and  open-market  orders  isfued 
should  be  reserved  from  the  appropriation  or  other  funds 
in  order  to  control  and  guard  against  over-expenditures. 
This  is  done  by  creating  reserves  on  the  basis  of  the 
totals  of  the  register  of  contracts,  and  the  register  of 
open-market  orders  transmitted  by  the  departments. 
The  purpose  of  the  two  registers  is  two-fold:  (i)  "To 
provide  a  complete  record  and  numerical  index  to  files 
of  orders  issued ;  (2)  to  establish  totals  of  estimated  or 
actual  amounts  by  means  of  which  the  accuracy  of  post- 
ings to  reserves  set  up  against  appropriation  or  other 
fund  accounts  .  .  .  may  be  proved."  '  The  journal  entry 
to  set  up  the  reserves  against  the  funds  reads  : 

Unencumbered  balances  of  authorizations  to  incur 
liabilities. 

To  reserve  for  contracts 
To  reserve  for  open-market  orders 
The  significance  of  this  entry  is  that  the  appropriations 
or  other  funds,  i.  e.,  the  sum  of  the  authorizations   to 
incur  liabilities,  is  reduced  by  the  amount  of  the  reserves 

^ Majinal  of  Accounting,  p.  56. 


2^2  FINANCES  OF  THE  CITY  OF  NEW  YORK  [456 

for  the  contracts  awarded  and  let,  and  for  the  open- 
market  orders  issued.  Since  the  departments  are  ex- 
plicitly forbidden  to  exceed  the  authorized  expenditures, 
any  attempted  over-expenditure  can  be  easily  detected 
and  prevented.  The  reserves,  on  the  other  hand, 
strengthen  the  credit  of  the  city  by  protecting  the  con- 
tractors and  vendors  against  any  possible  failure  to  ob- 
tain payment,  and  at  the  same  time  represents  the 
amount  of  contingent  liability  the  city  has  incurred 
against  the  appropriations  or  other  funds.  This  con- 
tingent liability  will  be  reduced  when  goods  are  delivered 
or  services  performed,  and  the  actual  liability  be  set  up 
in  its  place. 

B.    THE  INVOICES 

The  business  transactions  reach  the  invoice  stage  when 
the  contractor  or  vendor  delivers  a  part  of  the  commod- 
ities ordered  or  renders  a  part  of  his  services.  Ail  goods 
delivered  are  billed  at  agreed  prices,  including  delivery 
charges  to  the  point  of  delivery.  Each  delivery  must  be 
accompanied  by  invoices  in  quadruplicate  or  the  goods 
will  not  be  received.  If  at  any  time  it  is  necessary  to 
use  goods  which  have  been  delivered  without  invoices, 
the  person  receiving  the  goods  is  required  to  make  out 
memorandum  invoices  in  quadruplicate  and  state  thereon 
the  emergency  which  caused  such  action  to  be  taken.' 

As  stated  above,  upon  the  issue  of  an  open-market 
order  by  an  outside  department  to  a  vendor,  a  copy  of  it 
is  filed  with  the  division  of  inspection,  department  of 
finance.  It  must  show  prices,  either  actual  or  estimated, 
and  must  contain  a  full  and  clear  description  of  the 
article  or  items  so  that  the  inspectors  will  be  enabled  to 

'This  is  specifically  stated  in  the  contract  and  open-market  orders 
issued. 


c 


457]  CONTROL  OF  EXPENDITURE  273 

verify  the  prices  by  means  of  price  lists  or  otherwise. 
When  the  goods  are  dehvered  and  accompanied  by  in- 
voices in  quadruplicate,  one  copy  is  forwarded  to  the 
division  of  inspection,  advising  it  that  the  goods  have 
been  delivered.  One  copy  will  be  attached  to  the  voucher 
transmitted  to  the  comptroller  for  payment ;  one  copy 
will  be  attached  to  the  duplicate  voucher  filed  in  the 
central  office  for  future  reference,  and  the  fourth  copy 
may  be  used  for  the  information  of  the  purchasing  agent 
or  for  any  other  purpose  desired.' 

The  purchasing  department  is  required  to  furnish  the 
department  of  finance  with  a  schedule  of  invoices  regis- 
tered as  soon  as  practicable  after  their  receipt  and  always 
prior  to  the  transmission  of  the  vouchers  drawn  in  pay- 
ment of  their  amounts.  This  is  necessary  to  enable  the 
comptroller  to  register  the  actual  liabilities  as  they  are 
incurred.'  Upon  the  rendering  of  invoices,  actual  lia- 
bility must  be  established,  and  as  the  actual  liability  is 
established,  the  contingent  liability  must  be  proportion- 
ately reduced.  But  the  goods  delivered  have  not  yet 
been  inspected  and  may  be  rejected  by  the  city.  For  this 
reason  the  uncertified  invoices  do  not  represent  as  true  a 
claim  against  the  city  as  an  audited,  vouchered  claim. 
The  journal  entry  necessary  to  show  the  situation  reads : 
Departmental  expenditures  (undistributed) 
To  invoices  (uncertified)  payable 
The  debit  entry,  i.  e.,  the  account  "departmental  expendi- 
tures (undistributed)"  is  a  controlling  account  over  the 
detailed  expenditure  accounts  kept  by  the  various  depart- 
ments.    In  the  departments,  invoices  that  come  in  dur- 

'  See  circular  No.  3  in  respect  to  orders  issued  by  the  Department  of 
Finance,  Feb.  26,  1909. 

'Circular  No.  17. 


274  FINANCES  OF  THE  CITY  OF  NEW  YORK  [^-g 

ing  the  month  are  registered  in  a  register  of  invoices^ 
From  the  register  of  invoices,  which  provides  four  or 
more  columns  for  stores,  expenses,  construction,  prop- 
erty, etc.,  they  make  a  journal  entry  reading  : 

Stores 

Expenses 

Construction 

Property 

etc. 

To  Invoices  payable. 
The  total  of  each  of  the  four  or  more  colums  is  debited 
and  "  Invoices  Payable"  is  credited.  By  the  above  debits, 
four  or  more  individual  or  distributed  departmental  ex- 
penditure accounts  are  opened '  in  the  departmental 
books,  all  of  which  are,  however,  controlled  by  the  con- 
trolling account  "departmental  expenditures  (undis- 
tributed)" kept  in  the  general  ledger  in  the  department 
of  finance. 

This  controlling  account  "  departmental  expenditures 
(undistributed)"  Avill  be  subsequently  cleared  when  the 
various  departments  submit  reports  of  distributed  ex- 
penditures, at  which  time  "  departmental  expenditure 
(undistributed)"  will  be  credited  with  their  totals  and 
properly  classified  expense  accounts  will  be  charged.  It 
is  important  to  note,  however,  that  the  journal  entry 
"departmental  expenditure  (undistributed)"  to  "invoice 
payable "  has  not  yet  been  made  in  the  department  of 
finance.  Preparation  is  now  being  made  for  setting  up 
the  "  invoice  payable"  account  in  the  general  ledger,  and 
when  it  is  set  up,  the  plan  I  have  just  explained  will  be 
followed. 

'  See  an  address  on  Fegistratioti  and  Schedulizing  Expenditure  Doc- 
uments as  a  Basis  for  Accounting  Control— Use  of  Departmental  Ledg- 
ers, by  S.  L.  Bergen,  delivered  at  the  Bureau  of  Municipal  Research, 
March  12,  1913. 


459]  CONTROL  OF  EXPENDITURE  275 

C.       THE  INSPECTION  OF  GOODS   DELIVERED 

The  inspection  division  of  the  department  of  finance, 
having  been  notified  of  the  delivery  of  goods,  next  de- 
tails an  inspector  to  make  the  necessary  examination  of 
the  goods.  The  source  of  the  authority  of  the  comp- 
troller to  inspect  is  found  in  the  Charter,  which  pro- 
vides :  "  No  claim  against  the  city  for  services  rendered, 
for  work  done  or  for  supplies  furnished,  shall  be  paid 
unless  the  auditor  of  accounts  shall  certify  that  the 
charges  therefor  are  just  and  reasonable.'" 

The  city  is  not  bound  by  any  open-market  order 
issued  by  any  department  to  pay  the  amount  stipulated 
therein  if  it  is  found  by  the  comptroller  or  his  auditor  of 
accounts  that  the  amount  so  set  up  in  the  contract  or 
open-market  order  is  in  excess  of  the  market  value  of  the 
supplies  or  materials  furnished.^ 

Again  supplies  are  examined  by  the  inspectors  of  the 
department  of  finance  at  the  points  of  delivery  to  ascer- 
tain whether  or  not  they  agree  with  the  contract  specifi- 
cations. For  instance,  the  specifications  for  milk,  con- 
densed milk,  cream  and  butter  will  provide  : 

(i)  That  the  milk  and  cream  delivered  must  be  pro- 
duced from  cows  known  to  be  healthy ; 

(2)  That  persons  employed  in  the  barns  must  be  free 
from  contagious  diseases ; 

(3)  That  the  milk  must  be  received  in  pails  which  are 
clean,  and  must  be  cooled  within  two  hours  after  milk- 
ing to  below  50  degrees  Fahrenheit,  etc.^ 

If  the  supplies  do  not  conform  with  these  specifica- 

'  Section  149,  Greater  New  York  Charter. 

'  Ibid. 

'  See  a  circular  from  the  Secretary  of  the  Board  of  Estimate  to  the 
various  departments,  dated  Oct.  17,  1912,  transmitting  the  specifica- 
tions. 


276  FINANCES  OF  THE  CITY  OF  NEW  YORK  [460 

tions,  recommendation  is  made  to  the  head  of  the  de- 
partment that  they  be  rejected.  If  he  disregards  this 
recommendation,  the  comptroller  has  the  power  to  re- 
fuse the  payment  of  the  bill  when  presented.  Take  the 
purchase  of  horses  as  an  illustration.  There  is  not  a 
horse  bought  by  the  City  of  New  York  that  is  not  ex- 
amined by  the  veterinarian  employed  by  the  department 
of  finance.  Of  the  944  horses  examined  during  1912, 
710  were  accepted  and  234  were  rejected  on  the  ground 
that  they  did  not  conform  to  the  specifications.  On  the 
final  examination  of  the  710  horses  accepted,  80  were 
found  to  be  unsatisfactory  and  were  rejected,  thus  rais- 
ing the  total  number  of  horses  rejected  to  314.' 

It  must  be  borne  in  mind  that  the  inspection  division 
does  not  lay  down  any  standard  specifications  of  its  own. 
Its  function  is  merely  to  see  whether  or  not  the  supplies 
furnished  or  the  services  rendered  are  exactly  what  the 
specifications  adopted  by  the  committee  on  standardiza- 
tion of  supplies  call  for.  It  should  also  be  noted  that 
nearly  all  the  departments,  particularly  the  large  ones, 
have  their  own  inspection  systems.  It  has  been  the  aim 
of  the  department  of  finance  to  work  in  cooperation  with 
them.  If  the  storekeeper  of  a  certain  department  and 
the  inspector  of  the  department  of  finance  can  go  and 
examine  a  bill  of  goods  at  the  same  time,  a  great  deal  of 
friction,  as  it  exists  at  the  present  time,  will  be  avoided. 
It  will,  at  least,  avoid  the  trouble  of  carrying  on  a  long 
correspondence. 

D.    THE    VOUCHERS 

As  stated  above,  invoices  are  received  in  quadruplicate. 
One  copy  is  used  in  the  division  or  department  receiving 

'  See  address  by  James  J.  Munro,  Chief  of  the  Inspection  Division, 
Department  of  Finance,  on  The  Inspection  Division,  delivered  at  the 
Bureau  of  Municipal  Research,  May  7,  1913. 


461]  CONTROL  OF  EXPENDITURE  277 

the  goods  in  checking  up  the  prices,  quality  and  quan- 
tity, etc.,  of  the  supplies  ordered.  Upon  the  certifica- 
tion by  a  responsible  person  as  to  the  delivery,  prices, 
etc.,  and  upon  the  proof  of  clerical  and  mathematical  ac- 
curacy by  verification  of  the  calculations,  extensions,  etc., 
this  copy  is  then  used  as  a  basis  for  a  voucher  which  is 
prepared  in  duplicate.  A  voucher  may  be  defined  to  be 
a  document  officially  approved,  setting  forth  an  amount 
due  by  the  city  and  the  funds  out  of  which  it  is  payable, 
having  attached  to  it  the  invoice  or  other  evidence  to 
support  the  claim.  It  may  thus  cover  one  or  more  in- 
voices. 

There  are  four  classes  of  vouchers  containing  certifi- 
cates to  be  signed  by  persons  cognizant  of  the  facts,  as 
follows : 

1.  Payment  vouchers,  contract  (supplies),  A.  B,  C, 
D,  E. 

2.  Payment  vouchers,  open  market  order.  A,  B,  C,  D. 

3.  Payment  vouchers,  miscellaneous.  A,  B,  C,  D,  E. 

4.  Pay-roll  vouchers.  A,  B,  C,  D.' 

Each  of  these  four  classes  is  divided  into  four  or  five 
subdivisions,  viz.:  A.  vouchers  which  are  to  be  charged 
against  appropriations ;  B.  vouchers  which  are  to  be 
charged  against  special  revenue  bond  funds ;  C.  vouch- 
ers chargeable  against  corporate  stock  and  assessment 
funds  ;  D.  vouchers  chargeable  against  the  special  funds, 
and  E.  vouchers  chargeable  against  the  trust  funds. ^ 

In  order  to  list  all  the  vouchers,  schedules  of  vouchers 
will  then  be  prepared  in  duplicate.  The  original  copies 
of  the  voucher  schedules,  supported  by  original  vouchers 

'  Circular   No.  12,   Relative  to  Payment  of  Vouchers  Issued  by  the 
Comptroller,  March  21,  1910. 

^  See  Circular  No.  8,  Relative  to  Classification  of  Vouchers  by  Funds, 
issued  hy  the  Comptroller,  April  30,  1909. 


278  FINANCES  OF  THE  CITY  OF  NEW  YORK  [462 

and  the  certified  duplicate  copies  of  the  invoices  covered, 
will  be  forwarded  to  the  department  of  finance.'  The 
duplicates  of  the  schedules  and  vouchers,  etc.,  will  be 
used  by  the  purchasing  department  as  a  basis  for  entry 
in  the  separate  expenditure  accounts  kept  there. 

Upon  receipt  by  the  department  of  finance  of  the 
voucher  schedules,  vouchers  and  supporting-  papers  trans- 
mitted by  the  departments,  they  are  cursorily  inspected 
by  the  receiving  clerk  to  ascertain  whether  or  not  they 
are  properly  executed.  If  they  are  not,  they  are  refused 
acceptance  and  returned  to  the  department  transmitting 
them  for  proper  execution.  For  instance,  if  the  support- 
ing papers  which  should  accompany  vouchers  are  lack- 
ing, such  as  invoices  and  copies  of  orders  in  the  case  of 
open-market  order  vouchers,  or  if  the  contract  vouchers 
lack  the  requisite  contract  numbers,  they  are  not  accep- 
ted.'' If  they  are  properly  executed,  they  are  passed  along 
to  the  register  of  voucher  schedules  to  be  registered. 

Under  the  conditions  existing  some  years  ago,  the 
method  of  handling  the  vouchers  and  the  voucher  sched- 
ules was  too  cumbersome.  When  the  schedules  and 
vouchers  came  into  the  bureau  of  audit  of  the  depart- 
ment of  finance,  they  were  checked  and  registered,  and 
particular  numbers  were  given  to  them.  The  vouchers 
were  then  taken  by  the  bookkeepers,  who  posted  the 
vouchers  in  the  different  fund  accounts.  As  one  schedule 
might  contain,  and  often  did  contain,  entries  against  a 
dozen  different  fund  accounts,  it  was  necessary  for  a  clerk 
to  take  a  bundle  of  vouchers  and  to  go  from  one  book  to 

'  See  an  address  on  Invoice,  Voitcher,  and  Warrant  Cotitrol,  delivered 
by  a  senior  accountant  of  the  Bureau  of  Municipal  Research,  1913-14, 
at  New  York  University. 

"^  See  a  pamphlet  on  The  Procedure  Governing  the  Registratio7i  and 
Audit  of  Vouchers ,  issued  by  the  Comptroller,  Sept.  i,  1910,  pp.  1-5. 


463]  CONTROL  OF  EXPENDITURE  279 

another  to  make  his  postings,  with  the  result  that  two  or 
three  clerks  with  different  schedules  of  vouchers  were 
waiting  to  make  a  posting  in  the  same  book.  The  means 
of  proof,  like  the  collating  slip,  was  then  written  by  hand 
and  took  the  entire  time  of  one  man.  The  mechanical 
device  which  was  put  into  operation  to  do  away  with  this 
cumbersome  way  of  posting  is  the  "  posting  slip,"  which 
serves  as  a  substitute  for  the  voucher.  The  posting  is 
now  done  from  the  "posting  slip"  in  order  that  the 
vouchers  themselves  may  be  released  for  the  other  steps 
to  be  taken  in  the  bureau  of  audit. 

The  way  in  which  the  posting  slips  are  made  is  by 
having  a  typist  copy  the  voucher  on  three  slips  when  the 
voucher  schedule  accompanied  by  the  vouchers  comes  in. 
When  these  are  finished,  the  schedule  is  given  to  another 
operator,  who,  by  use  of  a  typewriter,  takes  off  a  proof 
of  the  schedule.  He  also  writes  a  collating  slip  by  the 
same  operation,  so  that  when  the  schedule  passes  through 
the  hands  of  the  two  operators,  the  three  posting  slips, 
the  collating  slips  and  the  proof  of  the  schedule  are  all 
made  practically  at  the  same  time. 

Two  of  these  posting  slips  are  used  by  the  clerks  in 
posting  the  vouchers  to  the  fund  ledger  and  contract 
ledger  if  they  are  contract  vouchers,  and  to  the  fund 
ledger  and  claimants'  ledger  if  they  are  open-market 
order  vouchers.  Under  the  old  process,  as  stated  above, 
four  or  five  clerks  would  gather  together,  each  having  a 
bundle  of  vouchers  in  his  hands  and  each  endeavoring  to 
get  to  the  books  to  make  the  postings.  Under  the 
present  process  one  clerk  has  forty  or  fifty  posting  slips 
assigned  to  him,  and  stands  at  his  ledger  to  post  from 
these  slips,  those  slips  relating  to  the  ledger  assigned  to 
him  being  already  brought  together  for  him.  This  new 
process  reduces  the  time  for  the  passage  of  the  voucher 


28o  FINANCES  OF  THE  CITY  OF  NEW  YORK  [464 

through  the  bureau  of  audit  by  fully  twenty-four  hours, 
increases  the  efficiency  of  postings  and  the  orderliness  of 
the  office,  and  reduces  the  working  force  by  about  six 
men.' 

The  three  posting  slips  are  prepared  by  one  operator, 
whereas  the  collating  slips,  which  are  used  in  proving 
the  accuracy  of  the  postings  into  the  ledgers  from  the 
posting  slips,  are  prepared  by  another,  so  that  an  error 
made  by  one  cannot  be  copied  by  the  other, 

E.       THE  TICKLER 

The  department  of  finance  provides  a  separate  book 
called  a  tickler  for  vouchers,  and  at  the  same  time  keeps 
a  record  of  the  time  when  they  are  delivered  to  other 
persons,  through  whose  hands  the  vouchers  must  pass, 
and  when  they  are  forwarded  by  them.  For  instance, 
when  the  tickler  clerk  receives  the  posting  slip  from  the 
registrar,  he  will  indicate  the  date  of  receipt  by  a  date 
stamp.  He  will  note  the  date  and  hour  of  the  delivery  of 
vouchers  to  the  bureau  of  audit  or  inspection  division  in 
the  proper  space  provided  on  the  tickler.  Upon  notice 
of  advancement,  he  will  again  note  the  date  and  hour  of 
delivery  on  the  tickler.  In  this  way  it  is  easy  to  trace 
the  movements  of  the  vouchers  and  to  ascertain  when 
they  are  delivered  and  forwarded,  thereby  enabling  the 
comptroller  to  find  out  the  cause  of  delay  and  the  reason 
for  a  detention  in  case  the  vouchers  are  withheld.  It 
should  be  noted  that  the  duty  of  the  tickler  clerk  is  not 
to  deliver  and  forward  the  vouchers  and  schedules  in 
person,  but  to  keep  a  record  of  the  date  and  hour  of 
their  delivery,  upon  receipt  of  due  notice. 

^  See  an  address  on  Accounting  Tests,  by  Mr.  Hervey,  the  chief 
auditor  of  the  Department  of  Finance,  delivered  at  the  Bureau  of  Munici- 
pal Research,  March  19,  1913. 


465]  CONTROL  OF  EXPENDITURE  28 1 

It  is  necessary  to  send  the  vouchers  to  the  lien  clerk 
for  examination  in  order  to  ascertain  if  any  notices  of 
lien  or  other  encumbrances  have  been  filed  against  the 
claims.  In  case  such  notice  has  been  filed,  they  are 
withheld.' 

Notwithstanding  this  ingenious  device,  it  was  found 
very  difficult  to  trace  the  movement  of  vouchers  in  the 
department  of  finance,  the  reason  being  that  under  the 
old  process  there  were  in  use  four  sets  of  tickler  num- 
bers, A,  B,  C  and  D,  representing  the  four  funds  out  of 
which  the  voucher  was  to  be  paid.  Accordingly,  there 
were  four  sets  of  numbers  to  be  followed  up,  four  sets  of 
filing  numbers  in  the  record  room  and  four  sets  of  num- 
bers all  through  the  office,  thus  making  the  process  very 
complex.  It  would  take  a  whole  day  for  a  man  to  make 
even  a  beginning  toward  getting  control  of  the  vouchers. 
Consequently,  a  simple  plan  of  having  only  one  set  of 
tickler  numbers  was  adopted.  Under  this  plan  a  very 
simple  form  of  tickler  is  set  up,  which  gives  the  comp- 
troller a  control  over  the  movement  of  the  vouchers  from 
the  time  they  come  into  the  bureau  of  audit  to  the  time 
they  are  ready  for  payment.  Every  voucher  can  now  be 
traced  through  all  the  branches  and  divisions  of  the  bu- 
reau at  any  hour  of  the  day.  If  any  voucher  is  delayed 
for  three  or  four  days,  the  tickler  will  tell  where  it  is,  and 
it  is  an  easy  matter  to  make  a  special  investigation  into 
the  case."" 

F.    VOUCHERS    IN    THE  INSPECTION  DIVISION 

Some  of  the  vouchers  are  sent  to  the  inspection  divis- 
ion and  some  are  not.     Those  that  are  sent  are  charged 

^Procedure  Governing  the  Registration  and  Auditing  of  Vouchers. 

^  See  an  address  by  IMr.  Hervey,  the  chief  auditor  of  the  Department 
of  Finance,  on  Accounting  Tests. 


282  FINANCES  OF  THE  CITY  OF  NEW  YORK  [466 

to  inspection  on  the  tickler  and  credited  to  it  when  for- 
warded to  the  bureau  of  audit.  As  vouchers  are  trans- 
mitted to  the  inspection  division,  the  person  who  made 
the  inspection  and  report  on  the  supphes,  materials  or 
repairs  forming  the  subject  of  the  claim  presented  must 
make  sure  that  the  quantity  of  the  articles  delivered  is 
correct  and  that  their  quality  and  character  are  in  con- 
formity with  specifications  and  trade  descriptions  con- 
tained in  the  contract  (or  order)  and  invoice  as  deter- 
mined by  personal  inspection.  After  the  inspector  has 
certified  as  to  the  quality  and  quantity  of  the  articles, 
they  are  delivered  to  the  inspectors  in  charge  of  the  price 
record  who  will  examine  and  certify  as  to  the  reasonable- 
ness of  the  prices  charged  and  in  case  of  contracts,  as  to 
the  prices  being  in  accordance  therewith.  If  somiC 
vouchers  require  an  examination  by  the  engineering 
division,  they  are  referred  to  the  engineers,  accompanied 
by  the  contracts  to  v/hich  they  relate.  The  engineers 
who  made  the  inspection  will  then  certify  as  to  the  quan- 
tity and  quality  of  the  work  done.' 

The  inspectors  are  not  allowed  to  hold  any  vouchers 
for  more  than  three  days  without  giving  the  reason  for 
so  doing.  Instances  are  many  where  the  inspectors  find 
it  very  difficult  to  certify  to  a  claim  in  their  possession. 
Consequently  they  are  required  to  fill  out  a  notice  of 
''Vouchers  Withheld,"  giving  the  reasons  for  withhold- 
ing them.  As  stated  above,  the  prices  charged  for  sup- 
plies delivered  are  often  found  to  be  excessive  and  the 
inspectors  feel  obliged  to  report  adversely  to  the  divis- 
ion chief,  citing  the  particulars  of  each  case.  Very  often 
these  adverse  reports  are  made  out  before  the  vouchers 
are  forwarded  to  the  inspection  division,  because  the  pre- 

^  Procedure  Governing  the  Registration  and  Audit  of  Vouchers,  pp. 
13-15. 


467]  CONTROL  OF  EXPENDITURE  283 

inspection  plan  adopted  by  the  inspection  division  en- 
ables the  inspectors  to  pass  upon  the  prices  charged 
before  the  voucher  is  actually  presented  to  the  depart- 
ment of  finance  for  payment.'  We  assume  that  all 
vouchers  are  favorably  verified  by  the  inspection  division 
and  returned  to  the  auditing  division. 

G.    THE  DIRECT  LIABILITY    REPRESENTED  BY  THE 
UNAUDITED    VOUCHERS 

The  amount  of  the  claim  against  the  city  up  to  this 
point,  as  shown  above,  is  recorded  in  the  "Invoices 
(Uncertified)  Payable  Account."  The  direct  liability 
has  now  reached  the  stage  of  unaudited  vouchers  which 
indicate  that  the  claim  against  the  city  is  now  better 
established.  The  proper  journal  entry  to  present  the 
correct  financial  situation  in  the  general  ledger,  will  be  : 

Invoices  (uncertified)  payable. 

To  vouchers  (unaudited)  payable. 
Thus  far,  we  have  set  up  two  journal  entries,  one  of 
which  is  to  record  the  direct  liability  represented  by  the 
invoices  and  the  other,  the  direct  liability  represented  by 
the  vouchers.  In  order  to  make  a  better  presentation 
of  the  case,  I  will  repeat  these  two  entries  as  follows  : 

First  Entry. 
Departmental  expenditures  (undistributed). 
To  invoices  payable  (uncertified). 

Second  Entry. 
Invoices  payable  (uncertified). 

To  vouchers  payable  (unaudited). 

As  stated  above,  the  department  of  finance  has  not 
yet  set  up  the  "Invoice  payable  (uncertified)"  account. 
Therefore,  that  department  makes  only  one  journal  entry, 

'See  Mr.  Munro's  address  on  The  Inspection  Division. 


284  FINANCES  OF  THE  CITY  OF  NEW  YORK  [468 

debiting  the   departmental   expenditures   and    crediting 
vouchers  payable,  as  follows  : 

Departmental  expenditures  (undistributed). 
To  vouchers  payable  (unaudited). 

By  this  single  entry,  as  is  apparent,  no  heed  is  paid  to 
the  liability  of  the  city  as  represented  by  the  invoices. 
As  the  departmental  expenditures  are  incurred  when  the 
invoices  are  rendered,  and  as  the  vouchers  covering  the 
invoices  may  come  in  considerably  later  than  the  invoices, 
it  is  very  essential  to  set  up  the  "  Invoice  payable  (un- 
certified)" account  in  order  to  record  the  liability  prior 
to  the  transmission  of  vouchers  by  the  department.  By 
reason  of  the  omission  of  this  account  from  the  general 
ledger,  the  comptroller's  office  fails  to  show  the  correct 
financial  position  of  the  city  at  the  time  when  invoices 
have  come  in  but  vouchers  have  not. 

It  is  important  to  call  the  reader's  attention  to  the 
fact  that  the  above-mentioned  accounts  are  all  controlling 
accounts  in  the  general  ledger.  There  are,  of  course, 
separate  accounts  in  the  subsidiary  ledgers.  For  in- 
stance, after  the  receipt  of  the  vouchers,  they  are  indi- 
vidually posted  from  the  posting  slips  to  the  separate 
accounts  in  the  appropriation  ledgers,  if  they  are  all 
marked  "A,"  /.  e.,  if  they  are  chargeable  against  appro- 
priations. This  shows  that  the  fund  in  each  appropria- 
tion account  is  burdened  with,  or  rather  reduced  by,  the 
amount  of  unaudited  vouchers  entered  therein,  just  as 
the  total  amount  of  appropriation  fund  for  the  city  is 
burdened  with,  or  reduced  by  the  total  amount  of  all 
unaudited  vouchers  that  have  come  into  the  department 
of  finance.  Therefore  the  "Vouchers  (unaudited)  pay- 
able "  account  in  the  general  ledger  is  a  controlling  ac- 
count for  all  unpaid  vouchers  entered  in  the  individual 
accounts  in  the  subsidiary  ledgers.     Its  balance  should 


469]  CONTROL  OF  EXPENDITURE  285 

be  equal  to  the  total  of  all  balances  in  separate  accounts, 
if  they  are  taken  at  the  same  time. 

Bearing  this  in  mind  and  remembering  that  we  are 
speaking  only  of  the  controlling  accounts,  we  shall  now 
return  to  the  journal  entry  referred  to  above,  reading : 

Invoices  (uncertified)  payable. 
To  vouchers  (unaudited)  payable. 

The  "  Invoices  (uncertified)  payable  "  account,  which 
we  assume  to  have  been  set  up  in  the  general  ledger  has 
now  been  reduced  by  the  amount  of  the  certified  invoices 
for  which  vouchers  have  been  transmitted.  Its  balance 
would  therefore  represent  the  amount  of  invoices  which 
are  still  uncertified  and  for  which  no  vouchers  have  been 
transmitted.  It  would  be  brought  to  the  attention  of 
the  financial  officer  at  regular  intervals,  and  if  the  delay 
in  certifying  and  vouchering  is  abnormal,  he  would  order 
an  inquiry  to  be  made. 

The  account,  "Vouchers  (unaudited)  payable,"  now 
takes  the  place  of  the  certified  and  vouchered  invoices 
which  have  been  reduced  from  the  account,  "Invoices 
(uncertified)  payable,"  and  represent  a  portion  of  the 
direct  liability. 

Up  to  this  point,  the  goods  ordered  have  been  re- 
ceived and  vouchers  to  liquidate  or  to  pay  the  invoices 
have  been  prepared  and  forwarded  to  the  department  of 
finance.  Therefore,  in  the  fund  group  of  accounts,  the 
portion  of  the  reserves  set  up  against  the  appropriations 
or  unencumbered  balances  to  incur  liabilities,  and  to  take 
care  of  the  contingent  liabilities  which  resulted  from  the 
letting  of  contracts  and  the  issue  ofjopen-market  orders, 
may  now  be  considered  as  applied.  Therefore,  in  the 
fund  group  of  accounts,  the  appropriation  funds  and  the 
reserves  should  be  reduced,  on  the  theory  that  the  vouch- 
ers prepared  in   payment  of^jthe   liabilities  diminish  the 


286  FINANCES  OF  THE  CITY  OF  NEW  YORK  [470 

funds  available  for  use  and  that  if  a  portion  of  the  direct 
liabilities  is  liquidated  or  paid  by  vouchers,  an  equal  por- 
tion of  the  reserves  is  rendered  unnecessary  and  should 
therefore  be  deducted. 

The  journal  entry  for  the  proper  presentation  of  the 
condition  in  the  fund  group  of  accounts  reads  as  follows: 
Reserve  for  contracts. 
Reserve  for  open-market  orders. 

To  unapplied  (net  cash)  balance. 

The  figures  will  be,  of  course,  the  totals  of  the  voucher 
register.' 

It  is  well  to  spend  a  few  minutes  here  to  discuss  the 
situation  in  the  accounts  as  brought  about  by  the  above 
entry.  The  accounts  in  the  general  ledger,  "  Reserve 
for  contracts"  and  "Reserve  for  open-market  orders" 
will  control  the  balances  of  reserves  in  the  detailed  ap- 
propriation, contract  and  claimant  ledgers,  which  in  turn, 
reflect  the  amount  of  the  contracts  entered  into  and  the 
orders  issued. 

If  goods  have  not  been  delivered  and  invoices  have 
not  been  sent  in  and  consequently  vouchers  have  not 
been  transmitted,  no  portion  of  the  reserves  set  up  can 
be  considered  as  applied.  Therefore,  the  inactivity  of 
the  reserve  accounts  will  direct  the  attention  of  the 
comptroller  to  the  abnormal  delay  in  delivering  goods 
and  rendering  invoices. 

H.    VOUCHERS  IN  THE  AUDTTING  DIVISION 

Up  to  this  point  we  have  explained  how  goods  are  de- 
livered with  invoices  in  quadruplicate  and  how  vouchers 
are  prepared,  scheduled  and  forwarded  to  the  depart- 
ment of  finance  and  certified  by  the  inspection  division. 

'  See  address  on  Invoice,  Voucher  and  Warrant  Control, 


471  ]  CONTROL  OF  EXPENDITURE  287 

However,  they  have  still  to  be  audited  by  the  auditing 
division  before  warrants  can  be  drawn  in  payment  of  the 
claims.  The  auditing  division  has  already  received  the 
following  documents  which  form  the  basis  of  auditing  : 

1.  The  report  of  inspection  submitted  by  the  inspec- 
tion division. 

2.  The  original  invoice  transmitted  directly  to  the  de- 
partment of  finance  when  goods  are  delivered  where,  with 
the  contract  order,  it  formed  the  basis  for  inspection. 

3.  The  voucher  transmitted  by  the  purchasing  depart- 
ment and  supported  by  a  certified  copy  of  invoice. 

Upon  the  assumption  that  the  report  of  the  inspection 
or  the  engineering  division  is  favorable,  the  deputy  chief 
auditor  will  then  deliver  the  vouchers  to  the  auditors, 
except  those  which  are  assigned  to  examiners  for  certi- 
fication as  to  mathematical  accuracy.  The  vouchers  in 
the  hands  of  examiners  will  be  delivered  to  the  auditors 
for  audit,  after  they  are  examined.  Each  invoice  at- 
tached to  the  voucher  will  be  examined  in  detail,  the 
mathematical  accuracy  of  all  calculations  and  extensions 
proved  and  all  footings  verified,  with  the  exception  of 
those  which  have  already  been  proved  by  the  examiners. 
The  next  step  to  be  taken  is  to  check  and  prove  the 
total  amount  of  invoices  thus  checked  and  proved  to  the 
total  amount  as  shown  on  the  face  of  the  voucher.' 

The  benefit  derived  from  the  audit  of  vouchers  must 
be  considered  enormous,  as  the  following  figures  will 
sufficiently  demonstrate.  The  volume  of  business  of  New 
York  City  has  grown  so  rapidly  that  during  the  six 
months  from  January  ist  to  June  30,  1913,  there  were 
$370,409,309  of  vouchers  registered.  There  were  $6,176,- 
546  of  vouchers  registered  in   1912  but  audited  in  1913. 

*  Procedure  Governing  the  Registration  and  Audit  of  Vouchers,  pp. 
15-18. 


288  FINANCES  OF  THE  CITY  OF  NEW  YORK  [j^y2 

The  total  of  these  two  amounts  was  reduced  by  cancel- 
lations and  adjustments  to  the  extent  of  $3,283,520.  In 
other  words,  the  audit  of  vouchers  and  pay  rolls  trans- 
mitted from  the  outside  departments  to  the  department 
of  finance  resulted  in  reduction  adjustments  representing 
the  sum-total  of  $3,283,520/ 

I.    THE  DRAWING,  SCHEDULING,   SIGNING  AND    DISBURSING 

OF  WARRANTS 

Under  the  old  process  of  the  new  accounting  system, 
the  warrants  were  drawn  by  hand.  The  amount  of  the 
claim,  the  name  of  the  payee,  and  the  number  of  the  ac- 
count were  all  transcribed  by  hand  on  the  face  of  the 
warrant  from  the  face  of  the  voucher.  After  the  voucher 
had  been  audited  as  described  above,  the  voucher  num- 
ber, the  amount  and  the  account  as  written  on  the  face 
of  the  warrant  were  then  checked  and  verified  with  the 
voucher  number,  amount  and  account,  as  shown  on  the 
back  of  the  voucher.^  Then  the  audited  vouchers  ac- 
companied by  the  warrants  were  delivered  to  the  war- 
rant-schedule clerk,  who  had  them  assorted,  numbered 
and  scheduled. 3  The  warrants  were  then  checked  to  the 
schedules  of  warrants  and  the  totals  were  proved.  If 
there  was  no  error,  the  warrants  and  vouchers  were  sent 
to  the  clerk  in  charge  of  the  records  of  expenditure  who 
would  distribute  the  warrants  to  the  entry  clerks  to  be 
posted  to  the  records. 

The  schedules  were  sent  to  the  registrar  of  warrant 
schedules.     The  registrar  would  register  the   schedules 

'  Semi-annual  Financial  Sunmiary  of  the  City  of  New   York,  issued 
by  the  Comptroller,  June  30,  1913,  p.  viii. 

'^Procedure  Governing  Registration  and  Audit  of  Vouchers. 

^Manual  of  Accouyiting  and  Business  Procedure,  City  of  New  York, 
p.  264. 


473]  CONTROL  OF  EXPENDITURE  289 

in  toto  by  funds  and  prepare  a  daily  summary  of  them. 
He  would  prepare  collating  tickets  from  the  schedules, 
itemizing  each  account  moving,  and  summarize  them  by 
funds,  proving  them  by  the  daily  summary.  If  the  proof 
was  correct,  the  tickets  and  the  summary  were  then  sent 
to  the  clerk  in  charge  of  the  records  of  expenditures  for 
the  purpose  of  checking  and  proving  the  postings  that 
had  been  made  from  the  warrants  to  the  records  of  ex- 
penditures. After  the  warrants  were  entered  in  the 
records,  they,  together  with  the  vouchers  and  schedules, 
were  transmitted  for  signature  in  the  manner  prescribed 
in  the  manual.  Upon  their  return,  they  v/ere  delivered 
to  the  lien  clerk  again  for  final  examination,  in  order  to 
ascertain  if  there  was  any  lien  filed  against  the  claim.  If 
there  was  none,  they  were  sent  to  the  disbursing  clerk, 
who  detached  the  warrants,  delivered  or  mailed  them  to 
the  payees  and  sent  the  vouchers  to  the  record  room.' 

Very  recently  a  new  device  has  been  installed  which  is 
a  typewriting  machine  so  constructed  that  it  will  write 
by  one  operation  the  warrant,  the  warrant  schedule,  and 
a  collating  or  report  slip  which  is  placed  behind  the  war- 
rant. Under  the  old  process  it  took  five  or  six  men  to 
write  the  warrants  ;  there  were  two  typewriting  operators 
writing  the  warrant  schedules,  a  man  supervising  them 
and  another  man  helping  them.  The  warrant,  the  w^ar- 
rant  schedule  and  the  collating  slip  are  now  written  at 
the  same  time.  The  warrant  schedule,  which  was  under 
the  old  process  made  out  separately  from  the f warrant, 
is  made  now  a  medium  of  posting  to  the  contract  and 
claimants'  ledgers.  This  is  as  good  as  the  warrants 
themselves  because  it  is  made  out  at  the  same  time  and 
by  the  same  operator  as  the  warrants.     This  relieves  the 

^Procedure  Governing  the  Registratioii  and  Audit  of  Vouchers,  pp. 
15-18. 


290  FINANCES  OF  THE  CITY  OF  NEW  YORK  [474 

warrants  for  other  use.  To-day  they  are  used  as  a 
medium  of  posting  to  the  fund  ledgers.  The  collating 
slip  or  report  slip  above  referred  to  is  used  as  a  basis  of 
the  daily  report  of  the  Comptroller,  which  is  published 
in  the  City  Record  on  the  day  following  each  working 
day,  containing  all  the  warrants  ready  for  payment  on 
the  previous  day  in  the  office.  A  report  is  also  made  of 
the  vouchers,  which  have  been  received  by  the  depart- 
ment of  finance  each  day,  so  that  any  claimant  against 
the  city  or  any  person  interested  in  city  expenditure  has 
in  these  daily  reports  a  complete  record  of  the  vouchers 
received  and  warrants  drawn,  the  name  of  the  claimant, 
the  date  of  invoice,  the  tickler  number  and  the  date  the 
voucher  was  received  in  the  department  of  finance  in  each 
case.  All  this  is  a  basis  for  making  his  inquiry.  If  the 
voucher  is  shown  to  have  been  received  on  a  given  day 
and  if  the  claimant  wants  to  know  all  about  it,  he  has  at 
his  disposal  the  tickler  number  as  the  basis  of  his  inquiry. 

The  daily  report,  which  under  the  old  process  required 
the  time  of  probably  three  or  four  clerks,  is  made  now 
merely  as  a  by-product,  as  shown  above.  The  basis  of 
the  report  on  the  vouchers  received  is  obtained  from  the 
posting  slip  referred  to  in  a  preceding  section,  which, 
after  the  postings  have  been  made,  have  ceased  to  have 
any  use.  About  three  hundred  dollars'  worth  of  clerical 
service  a  year  is  sufficient  to  collect  these  slips  and 
transmit  them  to  the  printer.  Under  the  old  process  it 
cost  the  city  a  much  larger  amount  to  prepare  this  report 
for  the  benefit  of  the  vendors. 

Of  course,  after  the  warrant  schedules  are  prepared, 
they  are  still  sent  to  the  registrar  of  warrant  schedules. 
He  will  register  them  in  toto  by  funds  and  prepare  a  daily 
summary  of  them.  He  will  also  prepare  collating  tickets 
and  prove  them  to  the  daily  summary. 


^75]  CONTROL  OF  EXPENDITURE  29I 

To  record  in  the  general  ledger  the  drawing  and  trans- 
mission of  the  warrants  to  the  chamberlain  for  payment, 
a  journal  entry  is  made  by  the  general  bookkeeper's 
office  of  the  department  of  finance,  reading: 

Vouchers  (unaudited)  payable 
To  warrants  payable. 

The  significance  of  this  entry  is  that  the  "Vouchers 
(unaudited)  payable  "  account  has  been  reduced  by  the 
sum  of  the  vouchers  which  have  been  audited  and  for 
which  warrants  have  been  prepared.  Its  balance,  there- 
fore, would  represent  the  number  of  vouchers  still  un- 
audited for  which  warrants  have  not  been  prepared. 
Delay  in  the  audit  of  vouchers  and  drawing  of  warrants 
by  the  auditing  division  would  be  disclosed  to  the  comp- 
troller by  the  inactivity  in  the  "vouchers  (unaudited) 
payable"  account. 

The  account,  "warrants  payable,"  marks  the  final  stage 
of  the  direct  liability.  It  will  be  cleared  when  actual 
payment  is  made.  The  warrants  are  then  sent  to  the 
mayor  and  the  comptroller  for  signatures.  In  the  mean- 
while checks  which  are  upon  and  made  a  part  of  the  war- 
rants are  signed  by  the  chamberlain.  The  signed  war- 
rants, with  the  signed  checks  attached  thereto,  are  next 
detached  from  the  vouchers  and  supporting  papers,  the 
items  being  checked  off  on  the  schedules  as  detached. 
If  the  checks  and  the  warrants  are  found  to  agree,  the 
total  of  the  warrant  schedule  will  be  registered  in  a 
"  Register  of  Warrant  Schedules."  The  signed  warrants 
and  checks  will  then  be  sent  to  the  payees  or  held  for 
them,  as  the  case  may  be,  while  the  vouchers  and  sup- 
porting papers  will  be  filed.  The  total  of  the  "Register 
of  Warrant  Schedules"  will  then  furnish  the  basis  for  the 
general  entry,  reading : 

Warrants  payable 
To  cash. 


292  FINANCES  OF  THE  CITY  OF  NEW  YORK      '     [476 

The  significance  of  the  "warrants  payable"  account  is 
that  the  comptroller  exercises  a  control  over  the  fund 
and  appropriation  accounts  kept  by  the  chamberlain,  to 
which  the  warrants  are  charged,  because  this  account  is 
based  on  the  register  of  the  schedules  of  warrants  re- 
ceived from  the  chamberlain.  Therefore,  the  comptroller 
knows  exactly  how  many  warrants  have  been  charged  to 
the  various  fund  and  appropriation  accounts  maintained 
by  the  chamberlain.  By  means  of  the  "  cash  "  account, 
a  control  is  likewise  exercised  by  the  comptroller  over 
the  amount  of  cash  paid  by  the  chamberlain,  -i.  e.,  over 
the  credit  entry  in  the  latter's  cash-book. 

This  entry — warrants  payable  to  cash — closes  the  cycle 
of  transactions,  which  consists  of  five  stages,  viz.,  (i)  the 
contract  or  open-market  order  stage,  (2)  the  invoice 
stage,  (3)  the  voucher  stage,  (4)  the  warrant  stage,  and 
(5)  the  check  or  payment-of-cash  stage.' 

J.       THE  PROMPT  PAYMENT  OF  CLAIMS 

Under  the  old  system  of  settling  claims  against  the 
city,  it  was  a  common  practice  for  the  city  employees  to 
expedite  payments  to  a  contractor  or  claimant  who  had 
political  influence  or  who  was  willing  to  reward  them  for 
earlier  payment.  It  is  a  matter  of  common  knowledge 
that  vendors  who  could  sell  to  the  city  under  the  most 
reasonable  terms  were  unwilling  to  enter  into  contractual 
relations  with  the  city  on  account  of  the  uncertainty  of 
the  date  of  payment  and  their  unwillingness  to  resort  to 
underhanded  means  of  expediting  the  payments.  The 
inevitable  result  was  that  the  city  paid  excessive  prices. 
The  delays  in  the  comptroller's  office  happened  mostly 
in  the  bureau  of  audit, ^ 

'  Invoice,  Voucher  and  Warrant  Control. 

^  Report  of  the  Cotmnittee  on  Finance  and  Currency  of  the  Chamber  of 
Commerce,  State  of  New  York,  on  Accojintitig  Reform  of  New  York 
City,  adopted  June  3,  1909,  pp.  18-19. 


477]  CONTROL  OF  EXPENDITURE  293 

If  the  city  wishes  the  taxpayers  to  make  quick  pay 
ment  of  taxes,  it  should  also  be  careful  to  avoid  unneces- 
sary delay  in  liquidating  its  obligations  towards  others. 
A  government  should  protect  its  credit  just  as  a  private 
individual  does,  and  one  of  the  best  means  of  protecting 
or  improving  it  is  to  be  as  prompt  as  practicable  in  the 
payment  of  its  own  bills.  To  accomplish  this  end,  the 
present  comptroller  has  devised  an  ingenious  scheme  by 
which  the  old  evil  practice  of  "making  arrangements" 
has  been  eliminated.  This  scheme  consists  of  placing 
every  voucher  transmitted  to  the  department  of  finance 
on  a  schedule,  which  must  be  recognized  all  the  way 
through  during  the  entire  audit.  It  would  be  a  violation 
of  the  rules  to  pay  a  voucher  out  of  its  order.  In  case 
it  is  necessary  to  do  so,  the  reasons  must  be  stated  and 
the  sanction  of  the  comptroller  or  his  deputy  must  be 
secured.  But  this  sanction  is  seldom  requested.  The 
result  is  that  the  payment  of  bills  is  now  made  on  an 
average  within  three  days,  instead  of  within  from  twenty 
to  thirty  days  as  was  generally  the  case  under  the  old 
system.  This,  of  course,  refers  to  accounts  involving  no 
dispute,  which  represent  ninety-five  per  cent  of  the 
accounts    passing   through   the   department   of    finance. 

When  we  say  that  the  payment  of  bills  requires  now 
three  days,  we  refer  to  the  time  consumed  in  passing  the 
vouchers  through  the  different  divisions  in  the  bureau  of 
audit,  department  of  finance.  We  do  not  take  account 
of  the  time  spent  in  the  departments  incurring  the  obli- 
gations.' But  there  is  no  reason  why  cash  payments 
should  not  be  made  in  less  than  five  days  through 
the  different  departments  and  bureaus  where  the  liability 
originates,  especially  when   the  city's  new   system  of  ac- 

^  A'aiional  Municipal  Review,  vol.  ii,  1913,  p.  225. 


294  FINANCES  OF  THE  CITY  OF  NEW  YORK  [478 

counting  is  in  full  operation.  When  this  is  done,  the 
city  will  be  able  to  secure  the  best  cash  discounts  and 
make  purchases  at  the  most  reasonable  prices. 

K.     THE     REPORT      SHOWING     THE      CONDITION     OF     EACH 

ACCOUNT 

As  we  have  already  pointed  out,  we  are  speaking  only 
of  the  controlling  accounts  kept  by  the  general  book- 
keeper of  the  department  of  finance,  over  the  detailed 
or  subsidiary  accounts  kept  by  the  disbursement  division 
of  the  auditing  bureau  of  the  same  department.  Time 
and  space  do  not  permit  us  to  discuss  the  latter,  but  the 
principles  involved  are  the  same  as  those  we  have  ex- 
plained. 

The  system  of  these  detailed  accounts  is  such  as  to 
enable  the  comptroller  to  issue  periodical  reports  for  the 
information  of  the  mayor,  the  board  of  estimate  and 
apportionment  and  others  interested,  setting  forth  the 
condition  of  each  fund  and  appropriation  account.  These 
reports  specify: 

(i)  Title  of  each  appropriation  account,  or  the  title  of 
each  special  revenue  bond,  corporate  stock  or  special 
and  trust  fund  account. 

(2)  The  original  amount. 

(3)  The  total  amount  of  funds  available,  the  transfers 
being  taken  into  consideration. 

(4)  The  voucher  or  warrant  charges. 

(5)  The  unexpended  balances,  derived  by  subtract- 
ing the  vouchers  from  the  total  amount  of  funds  avail- 
able. 

(6)  The  contract  and  open-market  order  encumbrances, 

and 

(7)  The  unencumbered  balance,  derived  by  subtracting 


479]  CONTROL  OF  EXPENDITURE  295 

the  contract  and  open-market  order  encumbrances  from 
the  total  amount  of  funds  available/ 

'  In  the  Annual  Report  of  the  Comptroller  for  1911,  all  these  particu- 
lars are  shown,  except  the  last  two.  See  the  report,  pp.  103-141.  As 
to  the  chaotic  condition  of  the  accounts  kept  in  the  Department  of 
Finance,  before  its  reorganization,  see  the  Report  of  the  Bureau  of 
Municipal  Research  to  the  Comptroller,  entitled  General  Description  or 
New  York  City's  Department  of  Fina7ice,  with  Recommendations  for 
Reform  (1Q08).  See  also  the  reports  of  the  various  divisions  of  the 
Department  of  Finance  to  the  Comptroller,  1908. 


CHAPTER  XII 

Control  of  Expenditure  for  Salaries  and  Wages 
Under  The  New  System  of  Accounting 

A.     BUDGET     the    FOUNDATION    OF    ACCOUNTING    CONTROL 

OVER    EXPENDITURES 

At  the  close  of  the  last  chapter  of  Part  I.,  we  touched 
lightly  upon  the  subject  of  budget  administration,  but  as 
no  budget  can  be  efificiently  administrated  without  a  good 
system  of  accounting,  we  postponed   full   discussion   of 
this  topic  until  we  were  ready  to  deal  with  the  subject  of 
accounting  control  over  expenditures,  which  forms  one 
of  the  two  main  topics  of  this  part.     The  primary  reason 
for  having  a  segregated  budget,  like  that  of  New  York 
City,  is  to  estimate  and  provide  funds  to  meet  the  opera- 
ting   and    administrative    expenses    of    the   various    city 
departments  and,  at  the  same  time,  to   circumscribe  the 
departmental  expenditures  within  the  purposes  definitely 
stated  in  the  budget,  or  to  exercise  a  control  over  them 
by  forbidding  the  departments  to  spend  more  than  the 
pre-determined    amount  or  amounts.     Indeed,   not  only 
the  various  departments  are  restricted  in  the  use  of  public 
funds,  but  also  the  several    bureaus  of  each  department 
and  the  several  divisions  of  each  bureau  are  placed  under 
equally  strict   budgetary  limitations.     The  principle  that 
each  appropriation  provided  for  a  specific  purpose  cannot 
be  spent  for  another  purpose,  has  been  adhered  to  by 
New  York  City  since  the  segregated    budget  came  into 

existence,  although  the  inter-se  transfers  are  granted  by 
396  [480 


48l]  CONTROL  OF  EXPENDITURE  297 

the  Board  of  Estimate  and  Apportionment.  These  inter- 
se  transfers  of  appropriations  are  restricted,  however,  to 
functions  within  the  same  department,  which  are  prac- 
tically similar  to  those  from  which  they  are  made.'  A 
well  organized  and  segregated  budget  is,  therefore,  the 
very  foundation  upon  which  an  effective  system  of  ac- 
counting and  administrative  control  rests. 

B.       THE  DATA  FOR  THE  MAKING  OF  PAYROLLS 

The  data  for  the  preparation  of  payrolls  are  obtained 
from  the  time  and  service  records  kept  by  the  city  de- 
partments, which  contain  evidence  of  the  attendance  of 
the  city  employees,  the  quantity  of  their  work  and  its 
results.  Such  a  record  is  useful  not  only  as  a  basis  for 
determining  the  efficiency  of  the  departmental  employees 
for  the  preparation  of  payrolls,  but  also  as  a  basis  for 
determining  the  efficiency  of  the  departmental  employees 
for  promotion  and  retention.  When  time  and  service 
records  are  prepared,  they  are  forwarded  to  the  heads  of 
the  divisions  of  the  various  departments,  daily,  weekly  or 
monthly,  according  to  the  nature  of  the  work  and  the 
other  requirements. 

Taking  the  city  as  a  whole,  there  are  now  in  use  sev- 
eral different  kinds  of  time  reports.  The  first  is  a  daily 
sheet  for  gangs  of  men  who  work  together  on  different 
kinds  of  work  in  a  day.  The  second  is  a  time  report  for 
gangs  of  men  who  are  doing  the  same  kind  of  work 
practically  day  after  day.  The  third  is  a  time  record 
kept  by  the  time  clock,  with  the  registering  instruments 
attached  thereto.  The  fourth  is  the  weekly  and  monthly 
time  sheet,  of  which  I  shall  speak  in  sufficient  detail  in 

^  See  the  Resolutions  of  the  Board  of  Estimate  and  Apportionment, 
as  attached  to  the  Final  Budget  of  1Q14. 


298  FINANCES  OF  THE  CITY  OF  NEW  YORK  [482 

order  to  bring  out  the  connection  between  the  time  and 
service  records  and  the  making  of  payrolls." 

For  purpose  of  illustration  I  will  take  the  time  and 
service  records  used  at  present  by  the  water  department, 
which  is  one  of  the  largest  departments  in  New  York 
City.  They  are  the  weekly  and  monthly  time  sheets.^ 
The  details  given  therein  are  the  bureau,  division  of  the 
bureau,  the  week  or  the  month  for  which  the  record  is 
kept  and  the  date  on  which  it  is  prepared.  All  these 
appear  at  the  top  of  the  sheets.  A  column  is  provided 
for  each  of  the  following:  (ij  the  name,  the  badge  num- 
ber, residence  and  civil  service  title  of  the  employee,  (2)  the 
rate  of  pay,  (3)  number  of  days,  including  regular  and 
special  time  and  overtime,  (4)  total  amount  due  to  the 
employee,  (5)  schedule  line  letter,  which  I  shall  explain 
presently,  and  (6)  distribution  by  amount  to  appropria- 
tion or  fund  account  chargeable.  The  last  column  is 
divided  into  seven  smaller  columns  for  the  insertion  of 
code  numbers. 

In  order  to  explain  (5)  and  (6)  clearly  I  must  again 
call  the  reader's  attention  to  the  segregation  of  budget- 
ary appropriations.  The  work  of  the  water  department, 
for  instance,  is  classified  into  several  functions,  each  of 
which  is  again  classified  into  several  sub-functions. 
Thus,  collection  of  water  revenue  is  a  function  of  the 
water  department.  This  function  branches  ofi  into  many 
sub-functions,  of  which  inspection  is  one.  In  chapter 
three,  it  will  be  recalled,  I  present  an  imaginary  schedule 
in  the  water  department  to  illustrate  the  method  of  fill- 

'  An  address  on  Payroll  Making  and  Auditing,  delivered  by  Mr.  J. 
H.  Clowes,  a  senior  accountant  of  the  research  bureau,  at  the  Bureau 
of  Municipal  Research,  April  23,  1913. 

'  See  the  time  and  service  records  of  the  water  department,  forms  no. 
7  and  no.  8. 


483]  CONTROL  OF  EXPENDITURE  299 

ing  out  a  personal  service  form  in  the  preparation  of 
budgetary  estimates.  There  the  schedule  is  given  a 
code  number,  482,  and  the  various  items  grouped  under 
this  code  number  each  constitute  a  schedule  line.  Thus, 
"chief  inspector,  2  at  $2,250,"  is  a  schedule  line. 

The  reason  why  the  last  column  is  divided  into  seven 
smaller  columns  is  because  an  employee's  time  may  be 
spent  in  several  places,  and  therefore  may  be  paid  for 
from  several  different  accounts,  each  account  having  a 
separate  small  column  provided  for  it. 

On  the  back  of  these  time  and  service  records  are  sev- 
eral certificates  provided  for  the  men  in  charge  of  em- 
ployees. For  instance,  we  have  a  certificate  to  be  signed 
by  a  foreman  immediately  in  charge  of  the  weekly  em- 
ployees or  other  person  in  charge  of  the  monthly  em- 
ployees. He  must  certify  that  the  time  shown  on  the 
time  sheet  and  credited  to  each  of  the  employees  men- 
tioned therein,  truly,  fully  and  correctly  represents  the 
time  such  persons,  except  when  granted  leave  of  absence, 
individually  worked  with  due  diligence  for  the  city  under 
his  direction,  etc.  The  superiority  of  such  a  certificate 
lies  in  the  fact  that  it  makes  him  responsible  under  the 
law  of  false  certification. 

C.  THE  PREPARATION  OF  PAYROLLS 

These  two  sheets,  when  properly  certified,  are  for- 
warded week  by  week  or  month  by  month,  as  the  case 
may  be,  to  the  payroll  division.  The  payroll  divisions 
are  to  be  consolidated  in  each  city  department,  so  that 
every  payroll  will  be  made  out  in  one  division,  instead  of 
in  several  different  divisions,  as  it  is  to-day.  The  weekly 
or  monthly  payrolls,  as  they  are  made  out  to-day,  are 
based  entirely  upon  the  information  recorded  in  the  two 
time  and  service  sheets.     When  the  sheets  are  once  made 


300  FINANCES  OF  THE  CITY  OF  NEW  YORK  [484 

up,  it  is  merely  a  matter  of  copying  to  make  up  the  pay- 
rolls. 

It  is  very  necessary  to  have  an  absolute  copy  of  the 
payrolls  before  they  are  sent  to  the  department  of  finance 
for  payment.  For  this  reason,  they  are  made  in  dupli- 
cate in  some  departments.  The  original  is  sent  to  the 
department  of  finance  and  the  duplicate  is  retained  in 
the  department  in  which  they  originate  for  the  purpose 
of  establishing  a  record  for  future  reference.  In  the 
water  department,  however,  the  place  of  the  duplicates 
is  taken  by  the  time  and  service  sheets  I  have  spoken  of. 
After  these  sheets  have  all  been  copied  in  the  payrolls 
which  have  gone  over  to  the  department  of  finance,  they 
are  filed  away  in  a  book  and  form  a  duplicate  payroll, 
showing  all  the  information  that  the  payroll  shows,  ex- 
cept that  the  method  of  arrangement  is  different.' 

Under  a  resolution  recently  adopted  by  the  board  of 
estimate  and  apportionment,  the  department  of  finance 
is  required  to  furnish  semi-monthly  payroll  forms  for  the 
convenience  of  those  departments  which  wish  to  pay  the 
present  monthly  payrolls  semi-monthly.  These  forms 
are  distinguished  from  the  weekly  and  monthly  payroll 
forms  by  dift'erent  colors.  Thus,  they  are  white  for  the 
payment  of  monthly  and  weekly  rolls,  and  blue  for  the 
payment  of  the  first  half  of  semi-monthly  payrolls,  and 
pink  for  the  payment  of  the  second  half  of  semi-monthly 
payrolls. 

D.    THE  RECAPITULATION    OF    PAYROLLS 

The  payrolls,  after  they  are  prepared,  must  be  recapitu- 
lated on  a  form  provided  for  that  purpose.  The  purpose 
of  recapitulating  them  on  a  single  form  is  to  bring  to- 

^  Payroll  Making  and  Auditing. 


485]  CONTROL  OF  EXPENDITURE  301 

gether  those  payrolls  which  are  chargeable,  in  whole  or 
in  part,  to  the  same  budget  appropriation,  schedule  line, 
corporate  stock,  special  revenue  bond,  or  special  and 
trust,  fund  account,  so  that  the  total  amount  chargeable 
to  each  of  the  accounts  for  the  period  covered  by  the 
payrolls  may  be  shown  through  the  operation  of  a  cross 
addition. 

To  illustrate,  the  water  department  has  some  sixty 
pumping  stations  in  Brooklyn  alone.  As  they  are  scat- 
tered here  and  there  at  great  distances,  it  is  impossible 
to  have  one  payroll  cover  all  the  employees  working  at 
those  different  stations.  It  is  necessary  to  prepare  a 
separate  payroll  for  each  station.  But  each  one  of  these 
sixty  payrolls  is  more  or  less  chargeable  to  the  same  ap- 
propriation account  and  to  the  same  schedule  line,  be- 
cause the  employees  are  the  same  class  of  men  working 
at  different  stations.  In  assembling  all  the  payrolls 
chargeable  to  one  account  or  one  schedule  line,  nothing 
can  better  serve  the  purpose  than  the  recapitulation 
sheet,  which  is  in  use  to-day. 

The  recapitulation  of  payrolls  is  required  to  show : 

1.  Numbers  and  titles  of  budget  appropriation  ac- 
counts, titles  of  budget  schedule  lines,  numbers  and 
titles  of  special  revenue  bond,  corporate  stock  or  special 
and  trust  fund  accounts,  represented  on  the  payrolls, 
against  which  each  employee's  salary  is  chargeable. 

2.  The  amount  expended  for  the  month  or  week. 

3.  The  pro-rata  of  budget  allowance  for  the  period 
covered  by  the  payroll,  which  may  be  one-twelfth,  or 
one-twenty-fourth  or  one-fifty-second  of  the  amount  of 
each  schedule  line. 

4.  The  accumulation  to  date  of  item  (3),  ?'.  e.,  the  por- 
tion of  each  schedule  line  expendable  to  date. 


302  FINANCES  OF  THE  CITY  OF  NEIV  YORK  [486 

5.  The  amount  expended  to  date,  including  the  cur- 
rent payroll  of  each  schedule  line.' 

6.  The  total  schedule  line  allowance  for  the  year,^  cor- 
rected as  amended. 

By  the  time  this  is  printed  some  changes  will  have  been 
made  in  the  payroll  forms  and  recapitulation  sheets.  Of 
the  six  headings  indicated  above,  only  the  first  and  the 
third  are  retained  in  the  new  form  of  recapitulation 
sheets,  the  other  four  being  eliminated.  The  new  form 
is  to  be  made  out  in  duplicate,  one  to  be  forwarded  to 
the  department  of  finance  with  the  payroll  or  payrolls 
which  it  recapitulates  and  the  second  to  be  retained  for 
ofifice  record. 

This  recapitulation  sheet  provides  for  the  following: 

(a)  Where  one  payroll  is  charged  against  one  code; 

(b)  Where  one  payroll  is  charged  against  more  than 
one  code; 

(c)  Where  more  than  one  payroll  is  charged  against 
one  code; 

(d)  Where  more  than  one  payroll  is  charged  against 
more  than  one  code. 

The  use  of  the  columns  of  the  "Recapitulation"  num- 
bered I  to  4  inclusive,  in  the  case  where  a  payroll  under 
•'d"  above  is  to  be  recapitulated,  is  as  follows: 

'  See  Circular  No.  6,  Preparaiion  of  Payrolls,  upon  Modified  Forins, 
Approved  by  the  Comptroller,  issued  by  the  Department  of  Finance, 
March  30,  1909,  p.  13. 


487] 


CONTROL  OF  EXPENDITURE 


303 


This  space  for  salary 
and  wage-schedule 
lines  and  payroll 
numbers,  where 
more  than  one  pay- 
roll is  recapitulated 
hereon. 


Pro-rata     of 
budget  al- 
I     lowanceto 
j     period 
\     covered  by 
I     payroll  re- 
capitulated 
hereon. 


10  clerks  at  $1,200. 
Payroll  No.  i  .  .  . 
Payroll  No.  2  .  .  . 
Payroll  No.  3  •    .    • 


$1,000.00 


Total  payroll 
charges 
again  s  t 

Recapitulation  of 
code  charges. 

each  bud- 
get sched- 
ule line  or 
fund      ac- 
count. 

Code  No. 
1000. 

Code  No. 
s-114. 

Code  No. 
S-115. 

$1,000.00 

$150.00 
150.00 
200.00 

$75-00 

75.00 

100.00 

$75-00 

75-00 

100.00 

$500.00 

$250.00 

$250.00 

In  this  case,  one-half  of  the  payroll  charges  is  payable 
from  the  budget,  and  one-half,  from  other  accounts,  as 
indicated  by  the  letter  "  s,' '  which  may  mean  special  fund. 
This  example  represents  the  most  complex  condition 
that  will  be  met  with.  The  procedure  for  the  simpler 
conditions  may  therefore,  be  easily  understood,  from  this 
example.  Where  code  distribution  is  required  to  a 
greater  extent  than  permitted  on  the  standard  "  Re- 
capitulation "  sheets,  a  paster  is  provided  for  extending 
these  sheets. 

It  is  important  to  note  here  that  the  information  con- 
tained in  the  old  form  of  recapitulation  sheet,  though  re- 
moved from  the  new  form,  is,  nevertheless,  indispensable 
to  the  departments  in  the  making  of  payrolls,  to  the 
board  of  estimate  and  apportionment  which  controls  the 
payroll  expenditure  and  to  the  comptroller  who  audits 
the  payroll  claims.  It  is  removed  from  the  new  form 
because  the  necessity  of  furnishing  it  to  the  makers  of 
payrolls  no  longer  exists.  It  has  been  some  six  years 
since  the  scientific  method  of  payroll-making  and  audit- 
ing was  adopted  by  New  York  City,  the  city  employees 


304  FINANCES  OF  THE  CITY  OF  NEW  YORK  [488 

in  charge  of  payrolls  having  already  acquired  a  habit  of 
making  payrolls  without  having  this  information  shown 
on  the  recapitulation  sheet.  Furthermore,  the  removal 
of  it  reduces  the  burden  of  the  recapitulation  sheet  to 
half. 

E.    THE  RESTRICTIONS    OVER    THE    EXPENDITURE    FOR 
PERSONAL  SERVICES 

Attention  should  be  directed  to  the  following  budget 
resolutions  adopted  by  the  board  of  estimate  and  appor- 
tionment, as  of  October  31,  1910,  governing  the  dis- 
bursement from  and  accounting  for  the  appropriations 
for  salaries  and  wages : 

Resolved  that  no  change  shall  be  made  by  any  board  or 
head  of  an  office,  bureau  or  department  in  the  city  or  county 
governments  in  the  schedules  of  "Salaries,  Regular  Em- 
ployees," "Salaries,  Temporary  Employees,"  "Wages,  Reg- 
ular Employees,"  "Wages,  Temporary  Employees,"  "Fees 
and  Commissions"  herein  contained,  except  when  authorized 
thereto  by  twelve  (12)  votes,  and  no  requests  for  changes 
shall  be  considered  except  as  follows  : 

a — In  the  case  of  schedules  or  appropriations  of  "Salaries, 
Regular  Employees,"  where  the  proposed  change  will  not  in- 
crease the  amounts  expendable  in  any  month  to  more  than 
one-twelfth  of  the  total  amount  herein  appropriated  for  •'  Sal- 
aries, Regular  Employees." 

b — In  the  case  of  appropriatio  ns  orschedules  of  "  Wages, 
Regular  Employees,"  where  the  proposed  change  will  not  in- 
crease the  amounts  expendable  in  any  week  to  more  than  the 
pro-rata  of  the  number  of  working  days  in  such  week  to  the 
total  number  of  working  days  provided  for  such  schedule  line 
for  the  whole  year." 

'  Circular  No.  26,  Instructions  to  Departments  Regarding:  Payrolls, 
issued  by  the  Comptroller,  July  28,  1914. 

"^Budget  for  1914,  p.  xx. 


489] 


CONTROL  OF  EXPENDITURE 


305 


*«^  *^  ^U  ^U  vl«  vL« 

*J*  *^^  *J*  *f*  *^  •^ 

In  cases  where  changes  in  schedule  lines  or  items  have  been 
authorized  by  twelve  votes  of  the  board  of  estimate  and  ap- 
portionment, all  sums  which  have  been  expended  against  the 
new  schedules  shall  not  exceed  the  original  sum  expended 
against  the  old  schedule.  For  instance,  if  an  original  sum  or 
appropriation  for  a  clerk  at  $2,400  be  changed  as  of  July  i,  to 
one  clerk  at  $1,200,  one  clerk  at  $600  and  two  messengers  at 
$300  each,  the  total  sum  expended  against  the  original  should 
be  apportioned  on  the  July  recapitulation  as  follows  (assum- 
ing the  full  half-year  allowance  at  the  original  rate  equal  to 
$1,200  has  been  spent):* 


This    space     for    salary 
and      wage  -  schedule 
lines  and  payroll  num- 
bers, where  more  than 
one  payroll  is  recapit- 
ulated hereon. 

P  r  o-r  a  t  a    of 
budget   al- 
lowance    to 
period    cov- 
ered by  pay- 
roll recapitu- 
lated hereon. 

Total     payroll 
charges 
against  such 
budget 
schedule-line 
or   fund    ac- 
count. 

Recapitulation 
of  code  charges. 

Code  No.  2,978. 

Clerk  at  $1,200       .    .    . 

Clerk  at  $600 

2  messengers  at  $300.  . 

$100.00 
50.00 
50.00 

$100.00 
50.00 
50.00 

$100.00 
50.00 
50.00 

$200.00 

$200.00 

$200.00 

Another  important  restriction  imposed  upon  the  de- 
partmental heads  in  the  disbursement  of  public  funds  for 
salaries  and  wages  is  that  the  departments,  when  sub- 
mitting their  estimates,  must  show  the  various  grades  of 
employment,  the  number  of  incumbents  in  each  grade 
and  the  rate  of  compensation,  all  of  which  are  incorpor- 
ated in  a  salary  and  wage  schedule  contained  in  the 
budget.     No    payroll    is   passed     by    the   department  of 

'  Circular  No.  18,  Instructiotts  to  Departments  Relative  to  Payrolls, 
issued  by  the  Comptroller,  December  2t,  1910,  p.  6. 


3o6  FINANCES  OF  THE  CITY  OF  NEW  YORK  [490 

finance,  unless  the  incumbents  and  the  rate  of  compen- 
sation agree  with  such  schedule  line  as  originally  adopted 
or  modified  by  the  board  of  estimate  and  apportionment. 

Still  another  important  restriction  is  imposed  upon  the 
departmental  heads  in  the  making  of  transfers  from  one 
schedule  to  another.  For  instance,  they  are  not  allowed 
to  make  transfers,  from  appropriations  or  schedules  of 
"Salaries  Regular  Employees,"  to  any  other  appropria- 
tion or  schedule  than  "Salaries  Regular  Employees," 
from  appropriations  or  schedules  of  "Salaries  Temporary 
Employees"  to  any  other  appropriation  or  schedule  than 
"Salaries  Temporary  Employees,"  from  appropriations 
or  schedules  of  "Wages  Regular  Employees"  to  any  other 
appropriation  or  schedule  than  "Wages  Regular  Em- 
ployees," and  from  appropriations  or  schedules  of  "Wages 
Temporary  Employees"  to  any  other  appropriation  or 
schedule  than  "Wages  Temporary  Employees."' 

These  and  some  other  restrictions  of  a  similar  character 
had  the  effect  of  returning  to  the  general  fund,  as  we 
shall  see  later  on,  large  balances  of  appropriations  which 
under  the  old  practice  would  have  been  wasted  in  the 
different  departments  during  the  closing  months  of  the 
year.  ^ 

F.   The    Purpose    and    Significance    of    thf    Re- 
strictions. 

The  several  restrictions  we  have  discussed  above  are 
intended  to  remove,  or  at  least,  to  make  difficult,  certain 
evil  practices  that  are  inimical  to  the  purpose  of  budget- 
making.  It  has  been  a  common  practice  among  the  de- 
partmental heads  to  keep  the  personal  service  expenditure 

^  See  the  resolutions  accompanying  the  preface  of  the  1914  Budget. 
^Annals  of  American  Academy  of  Political  and  Social  Science,  igi2, 
vol.  xiv.,  p.  47. 


^C)i]  CONTROL  OF  EXPENDITURE  307 

at  a  low  level  for  a  portion  of  the  year  in  order  that  the 
accumulated  excess  may  be  used  to  increase  the  salaries 
of  their  favorites  just  before  the  budget-making  time. 
This  had  the  elTect  of  making  the  appropriating  body 
treat  these  padded  rates  of  compensation  as  the  basis  for 
the  appropriation,  of  subsequent  years. 

It  was  heretofore  not  an  uncommon  thing  for  departmental 
heads  to  use  the  higher  salaries  on  the  competitive  civil  ser- 
vice list  when  vacancies  occurred  to  employ  a  large  number 
of  cheaper  employees,  especially  when  an  election  was  ap- 
proaching. This  resulted  in  filling  offices  with  incompetents 
and  seriously  affected  the  esprit  de  corps  of  organization. 
Another  evil  practice  was  to  spend  the  unexpended  balances 
of  the  accounts  in  a  wasteful  way,  at  the  end  of  the  year,  in- 
stead of  allowing  them  to  return  to  the  general  fund.  Still 
another  evil  practice  was  to  run  at  a  relatively  high  rate  of 
expenditure  at  the  beginning  of  the  year,  thereby  exhausting 
the  appropriation  before  the  year  is  ended  and  forcing  the 
board  of  estimate  to  issue  special  revenue  bonds.  The  last 
means  resorted  to  was  to  ask  for  more  employees  at  the 
budget-making  time  and  then  to  reduce  them  in  order  to  have 
an  available  surplus  to  increase  the  salaries  of  favorites.' 

All  of  these  have  now  become  a  thing  of  the  past,  as  a 
result  of  the  restrictions  discussed  above. 

The  importance  of  these  restrictions  cannot  be  too 
sharply  emphasized.  Payrolls  make  up  the  largest  item 
in  the  annual  budget.  In  1913,  out  of  a  budget  of  $192,- 
700,000,  $91,317,000  was  spent  for  payrolls  alone. ^  To  this 
amount  should  be  added  $20,000,000  paid  out  of  other 
funds.     Were    it    not    for    the    restrictions,    the    payroll 

'  See  Handbook  of  Municipal  Accounting,  p.  150. 
'See  a  leaflet.  Tracing  Tax  Increase  to  the  Payroll,  issued  by  the 
Bu  reau  of  Municipal  Research,  July  26,  1913. 


3o8  FINANCES  OF  THE  CITY  OF  NEW  YORK  [492 

expenditures  for  1913  might  have  been  several    milHon 
dollars  higher. 

The  significance  of  these  restrictions  is  clearly  demon- 
strated by  the  marked  increase  in  the  returns  of  unex- 
pended balances  of  salary  and  wage  appropriations  to  the 
general  fund,  for  the  diminution  of  taxation.  Thus,  for 
the  year  1908,  before  the  schedule  regulations  of  the 
board  of  estimate  and  apportionment  were  enforced,  the 
amount  of  unexpended  balances  returned  to  the  general 
fund  was  only  $3 14,760. 76.  In  1909,  the  amount  returned 
rose  to  upward  of  $1,081,748.34,  owing  to  the  fact  that 
some  partial  schedule  regulations  had  already  taken  effect 
by  that  time.  In  1910,  when  these  regulations  were  fully 
enforced,  the  amount  returned  from  the  same  source 
came  up  to  $1,958,730.67.  For  191 1,  the  salary  and 
wage  accruals  returned  to  the  general  fund  aggregated 
$1,391,185.26,  showing  a  decrease  below  the  previous 
year  of  $567,545.41.  This  decrease  was,  however,  due 
to  the  fact  that  a  large  cut  had  already  been  made  in  the 
salary  appropriations  for  most  of  the  departments,  in  per- 
suance  of  a  resolution  adopted  by  the  board  of  estimate 
and  apportionment,  requiring  all  the  city  departments  to 
reduce  the  1911  estimates  by  ten  per  cent.' 

G.    PAYROLL  EXAMINATION  AND  PAYROLL  AUDITING 

When  the  originals  of  the  payrolls  are  forwarded  to  the 
department  of  finance,  they  are  registered  there,  the  re- 
gister forming  the  basis  of   the  journal  entry  reading: 
Departmental    expenditures    (undistributed). 
To  payrolls  payable  (unaudited). 
The  significance  of  this  entry  is  that  the  "  department 
expenditures  (undistributed)"   are  debited,  because   the 

^Annals  of  Am,  Acad,  of  Pol.  and  Soc.  Science,  p.  50. 


493]  CONTROL  OF  EXPENDITURE  309 

payrolls  are  charged  to  departments  where  they  origi- 
nate, and  the  account  of  "payrolls  payable  (unaudited)" 
is  credited,  because  the  unaudited  payrolls  form  a  liabil- 
ity against  the  city.  After  they  are  registered,  they  are 
sent  to  the  civil-service  commission  for  examination. 
This  commission  is  appointed  by  the  mayor,  on  the  con- 
dition that  not  more  than  two-thirds  of  its  members 
shall  be  members  of  the  same  political  party.  Under 
chapter  three  of  the  general  laws,  commonly  known  as 
the  civil  service  law,  this  commission  is  charged  with 
the  duty  of  prescribing,  amending  and  enforcing  rules 
for  the  classification  of  the  offices,  places  and  employ- 
ments in  the  public  service  of  the  city,  as  well  as  for  the 
registration  and  selection  of  employees  for  employment 
therein.' 

The  payrolls  are  examined  by  this  commission  to  ascer- 
tain if  the  employment  of  the  individual  employees  is  in 
accordance  with  the  civil  service  rules  and  if  the  kind  of 
w^ork  they  are  doing  for  the  city  is  exactly  what  their 
civil  service  titles  call  for.  If  any  person  is  employed  in 
the  municipal  service  in  violation  of  the  civil  service 
laws  and  rules,  the  persons  preparing  the  payrolls  and 
certifying  to  their  accuracy  are  held  responsible  for  the 
false  statements,  contained  therein,  under  the  law  of  false 
certification.  If  an  employee  is  engaged  in  work  which 
is  not  called  for  by  his  civil  service  title,  the  fact  must  be 
shown  on  the  payroll.  Failure  to  do  this  makes  the  de- 
partmental head  legally  liable  for  false  certification,  since 
his  certificate,  as  we  shall  see  later  on.  specifically  covers 
this  point.  In  this  way,  the  esprit  de  corps  of  corporate 
organization  is  protected  from  corruption  and  the 
municipal    employees   are  relieved    from    favoritism  dis- 

'  New  York  Charter,  section  123. 


3IO  FINANCES  OF  THE  CITY  OF  NEW  YORK  [4^4 

played  in  assigning  them  to  positions  for  which  they  are 
not  qualified. 

Upon  the  return  of  the  payrolls  from  the  civil  service 
commission,  they  are  audited  in  the  department  of  finance 
to  see  whether  or  not  they  are  properly  made  out,  i.  e., 
whether  the  grade  of  service,  or  the  title  of  each  schedule 
line,  the  number  of  incumbents,  the  rate  of  compensa- 
tion, the  pro  rata  for  the  month  or  Vt^eek,  the  footings 
and  extensions,  etc.  are  all  correct.  In  other  words, 
the  payrolls  are  compared  with  the  comptroller's  record 
to  see  whether  or  not  they  are  in  every  respect  in  accor- 
dance with  the  provisions  of  the  budget  and  the  reso- 
lutions of  the  appropriating  body.  Every  fact  essential 
to  proper  audit  by  the  comptroller  should  be  set  forth 
on  the  payroll.  As  these  facts  are  certified  to  by  per- 
sons immediately  in  charge  of  the  employees  or  cogni- 
zant of  the  facts,  and  verified  by  the  comptroller's  aud- 
itors, it  is  safe  to  say  that  the  payroll  expenditure  of 
the  city  is  now  practically  brought  under  control.  In 
case  discrepancies  or  errors  are  found  in  the  payrolls, 
they  are  held  up  for  further  investigation.  Otherwise, 
they  are  passed  by  the  department  of  finance  and  a  war- 
rant is  drawn  for  their  total  amount  in  favor  of  the  city 
paymaster.  The  amount  of  the  warrants  drawn  is  re- 
gistered and  forms  the  basis  for  a  journal  entry  reading: 

Payrolls  payable  (unaudited). 
To  warrants  payable. 

This  entry  shows  that  the  account  of  "  payrolls  pay- 
able (unaudited)"  is  reduced  by  the  amount  of  the  pay- 
rolls which  have  been  audited  and  for  which  warrants 
have  been  drawn,  and  that  the  account  of  "  warrants 
payable "  is  credited,  because  a  portion  of  the  liability 
originally  represented  by  the  unaudited  vouchers  is  now 


495]  CONTROL  OF  EXPENDITURE  311 

represented  by  the  warrants  which  have  been  drawn  to 
cover  them. 

The  total  number  of  employees  of  the  city  was  estimated 
(1912)  at  107,000,  of  whom  about  85,000  are  regular 
and  22,000  temporary  employees.  The  latter  consist 
chiefly  of  the  election  officials,  and  about  15,000  men 
temporarily  employed  by  the  street-cleaning  department 
in  the  removal  of  snow.  About  65,000  of  the  regular 
employees,  including  over  17,000  teachers,  over  10,000 
policemen,  and  over  4,300  firemen,  are  paid  by  checks, 
amounting  to  approximately  $75,000,000.  The  amount 
paid  in  cash  aggregates  about  $14,000,000.' 

H.  PAYROLLS  SUPPORTED  BY  CERTIFICATES 

In  New  York  City,  payroll  facts  are  developed  and 
supported  by  the  several  certificates  which  are  signed  by 
persons  in  charge  of  the  payroll  and  those  having  knowl- 
edge of  the  facts.  These  certificates  are  intended  to 
cover  the  most  important  features  in  payroll  making. 
Every  essential  element  of  information  necessary  to  the 
location  of  the  responsibility  for  the  correctness  and  in- 
tegrity of  payrolls  should  be  included  in  the  certificates. 
When  this  rule  is  strictly  conformed  to,  it  is  well-nigh 
impossible  for  the  signers  of  the  certificates  to  ofTer  the 
same  pretext  as  they  did  during  the  period  of  loose  ad- 
ministration, that  they  could  not  assume  the  responsi- 
bility for  the  accuracy  of  the  payrolls,  because  they  could 
not  have  facts  brought  to  their  knowledge. 

The  certificates  that  are  now  required  to  be  signed  by 
the  department  officials  are  as  follows  : 

a.  The  person  under  whose  direction  the  payroll  or  payrolls 
are   prepared   certifies    that    the   payroll   is  correct  and  the 

^National  Municipal  Review,  vol.  ii,  no.  2,  April,  1913,  pp.  222-223. 


312  FINANCES  OF  THE  CITY  OF  NEW  YORK         ,[4^5 

amounts  stated  on  the  accompanying  payroll  sheets  no.  i  to 
—  are  correctly  recapitulated  in  the  payroll  voucher  and  are 
properly  charg^ed  against  the  accounts  stated  therein,  and 
so  on. 

b.  The  departmental  auditor  or  bookkeeper  or  other  person 
cognizant  of  the  facts  certifies  that  the  amounts  shown  on  the 
payroll  voucher  are  proper  charges  against  the  account  or  ac- 
counts stated  herein,  that  payment  of  the  amount  stated  will 
not  exceed  the  unencumbered  balances  of  the  respective  ap- 
propriations or  other  funds  authorized  after  such  appropria- 
tions or  funds  have  been  charged  and  encumbered  with  all 
outstanding  liabilities  incurred  against  them,  and  so  on. 

c.  The  head  of  the  department  certifies  that  the  signatures 
of  the  persons  designated  by  him  to  make  the  payrolls  are 
genuine,  that  the  persons  named  thereon  were  duly  elected, 
or  were  appointed  or  promoted  to,  or  employed  in,  the  posi- 
tion indicated  in  accordance  with  the  Civil  Service  Law,  that 
except  when  granted  leave  of  absence,  the  persons  named  on 
the  payroll  have  been  regularly  employed  in  the  performance 
of  the  appropriate  duties  of  such  indicated  positions  and  have 
at  no  time  during  the  period  covered  by  the  payroll  been  as- 
signed to  the  performance  of  duties  pertaining  to  any  other 
position  except  as  otherwise  stated  in  the  payroll,  and  so  on.' 

'  See  the  certificates  printed  on  the  back  of  the  new  forms  of  recapit- 
ulations. Compare  the  new  certificates  with  the  old  as  shown  in  the 
pamphlet,  Preparation  of  Payrolls  with  General  Instructions  to  Depart- 
fnents  Relative  to  all  Forms  of  Payrolls,  etc.,  issued  by  the  Depart- 
ment of  Finance,  March  30,  1909,  pp.  17-21. 


VITA 


The  author  was  born  in  1885  in  the  province  of  Cheh- 
kiang,  China,  and  was  educated  at  the  Anglo-Chinese 
College,  Shanghai,  and  the  Pei-yang  University,  Tientsin. 
In  this  country  he  took  a  full  undergraduate  course  at 
Yale  University,  entering  in  1907  and  receiving  the  de- 
gree of  A.  B.  in  1910  with  first  honor.  In  the  fall  of  the 
same  year,  he  entered  Columbia  University,  attending 
the  courses  in  the  School  of  Political  Science  under 
Professors  Seligman,  Seager,  Goodnow,  Giddings  and 
Beard,  and  the  seminar  under  Professors  Seligman  and 
Seager.  From  1913  to  1914,  he  attended  the  courses  in 
the  School  of  Accountancy,  New  York  University,  un- 
der Professors  Wildman,  Brummer,  Maddan,  Douglas, 
Johnson  and    Greedlinger. 

313 


